Problem 21 - Accounting

Question

The Assembly Department produced 2,000 units of product during June. Each unit required 1.5 standard direct labor hours. There were 3,200 actual hours used in the Assembly Department during June at an actual rate of \(14.00 per hour. The standard direct labor rate is \)15 per hour. Assuming direct labor for a month is paid on the fifth day of the following month, journalize the direct labor in the Assembly Department on June 30.

Step-by-Step Solution

Answer

Debit Work in Process for $45,000; Credit Wages Payable for $44,800; Credit Labor Cost Variance for $200.

Step 1: Calculate Standard Labor Cost

First, calculate the standard labor cost based on the standard labor hours and rate.The total standard labor hours required = Number of units produced \( \times \) Standard labor hours per unit. \[ 2000 \text{ units} \times 1.5 \text{ hours/unit} = 3000 \text{ hours} \] Then calculate the cost using the standard labor rate:\[ 3000 \text{ hours} \times 15 \text{/hour} = 45000 \text{ dollars} \]

Step 2: Calculate Actual Labor Cost

Now, calculate the actual labor cost using the given actual hours worked and the actual labor rate.\[ 3200 \text{ hours} \times 14 \text{/hour} = 44800 \text{ dollars} \]

Step 3: Determine Labor Variance

Find the difference between the standard labor cost and the actual labor cost to determine the labor variance.\[ 45000 - 44800 = 200 \text{ dollars} \]"Since the actual cost is less than the standard cost, this is a favorable variance.

Step 4: Journalize the Direct Labor Cost

Create the journal entry to record the actual labor costs.- Debit Work in Process (WIP) Inventory for the standard labor cost: \[ \text{Work in Process Inventory: } 45000 \text{ dollars} \]- Credit Wages Payable for the actual labor cost paid (since wages are paid next month): \[ \text{Wages Payable: } 44800 \text{ dollars} \]- Credit Labor Cost Variance for the favorable variance: \[ \text{Labor Cost Variance (Favorable): } 200 \text{ dollars} \]

Key Concepts

Standard Labor Cost

Standard labor cost is the expense that a business expects to incur for labor when producing a certain quantity of goods. It is based on predetermined factors such as the standard labor hours needed per unit and the standard hourly wage rate. In our example, the Assembly Department produced 2,000 units, with each unit requiring 1.5 hours of labor. This gives us a total of 3,000 labor hours. The standard rate per hour is set at $15. Therefore, the total standard labor cost for June is calculated to be $45,000. Understanding this cost helps businesses in budgeting and setting financial targets.

Actual Labor Cost

Actual labor cost refers to the real expenditure incurred by a company to pay for labor during a production period. This cost can vary from the standard cost due to differences in hours worked and hourly rates. In the exercise, 3,200 actual labor hours were logged at a rate of $14 per hour. The resulting actual labor cost was $44,800. Deviations from the standard labor cost are valuable indicators for management to identify areas of improvement or efficiency gains.

Journal Entry

Recording a journal entry for labor costs is an essential part of accounting. It ensures that labor expenses are accurately reflected in financial statements. Here's how the journal entry works for our scenario:

• Debit the Work in Process (WIP) Inventory account for the standard labor cost of $45,000.
• Credit the Wages Payable account for $44,800, as this amount will be paid out next month.
• Credit the Labor Cost Variance account for $200, acknowledging the favorable variance.

This entry helps maintain clarity in financial records and ensures that all labor-related costs are properly accounted for.

Favorable Variance

A favorable variance occurs when the actual costs are less than the standard costs. It indicates efficiency or savings in the production process. In the provided example, the variance was calculated as $200. This was derived by subtracting the actual labor cost ($44,800) from the standard labor cost ($45,000). A favorable variance is generally a positive outcome, signaling that the actual labor performance was better than expected, either through reduced hours or lower hourly rates. It's crucial for businesses to analyze variances to understand operational performance and make data-driven decisions.