Problem 9 - Accounting

Question

Alpine Bicycle Company manufactures mountain bikes. The following data for May of the current year are available: \(\begin{array}{lr}\text { Quantity of direct labor used } & 600 \mathrm{hrs} . \\\ \text { Actual rate for direct labor } & \$ 12.50 \text { per hr. } \\\ \text { Bicycles completed in May } & 280 \\ \text { Standard direct labor per bicycle } & 2 \mathrm{hrs} . \\ \text { Standard rate for direct labor } & \$ 2.75 \text { per hr. } \\ \text { Planned bicycles for May } & 310\end{array}\) a. Determine the direct labor rate and time variances. b. How much direct labor should be debited to Work in Process?

Step-by-Step Solution

Answer

Direct labor rate variance is $5850, time variance is $165. Debit Work in Process with $1540.

Step 1: Determine Actual Direct Labor Cost

First, calculate the actual cost of direct labor used in May. Multiply the actual hours worked by the actual rate per hour.Actual Direct Labor Cost = Quantity of Direct Labor Used \( \times \) Actual Rate for Direct Labor\[600 \text{ hrs} \times \\(12.50 / \text{hr} = \\)7500\]

Step 2: Calculate Standard Direct Labor Cost

Next, calculate what the direct labor cost should have been, if everything went according to the standard. Multiply the bicycles completed by standard hours per bicycle, then by the standard rate.Standard Direct Labor Cost = (Bicycles Completed \( \times \) Standard Hours per Bicycle \( \times \) Standard Rate)\[280 \times 2 \text{ hrs/bike} \times \\(2.75/\text{hr} = \\)1540\]

Step 3: Calculate Direct Labor Rate Variance

The direct labor rate variance indicates whether the company paid more or less than expected for labor. Calculate it by multiplying the difference in actual and standard rates by actual hours worked.Direct Labor Rate Variance = (Actual Rate - Standard Rate) \( \times \) Actual Hours Worked\[(12.50 - 2.75) \times 600 = 5850\]

Step 4: Calculate Direct Labor Time Variance

The direct labor time variance reveals whether the work took more or less time than expected. It's calculated by multiplying the difference between actual hours and standard hours by the standard rate.Direct Labor Time Variance = (Actual Hours - Standard Hours) \( \times \) Standard Rate\[[600 - (280 \times 2)] \times 2.75 = 165\]

Step 5: Compute Cost to Be Debited to Work in Process

Finally, calculate the direct labor cost that should be recorded in the Work in Process by using the standard direct labor.Direct Labor Cost = Standard Direct Labor Cost (as calculated in Step 2)\[\$1540\]

Key Concepts

Direct Labor Rate Variance

The direct labor rate variance measures whether a company spent more or less on labor than anticipated. In Alpine Bicycle Company's case, we start by analyzing the difference between what was actually paid for labor and what was expected to be paid, according to standard labor rates. To calculate it, subtract the standard rate from the actual rate and multiply by the actual hours worked. For this exercise:- Actual Rate = \(12.50 per hour- Standard Rate = \)2.75 per hour- Actual Hours = 600The formula becomes: \[ \text{Direct Labor Rate Variance} = (12.50 - 2.75) \times 600 = 5850 \]This positive variance indicates that Alpine Bicycle Company paid much more in wages than initially estimated. A deeper look into why these costs were higher, such as overtime or higher wages due to more skilled labor, might be beneficial.

Direct Labor Time Variance

Direct labor time variance assesses whether labor hours exceeded or were below expectations. In essence, it tracks if more hours were required to complete production compared to what was planned. To find it, compare actual labor hours used with the standard expected hours for the work completed, then multiply the difference by the standard rate. For this scenario:- Actual Hours = 600- Standard Hours = 280 bicycles completed \(\times\) 2 hours each = 560- Standard Rate = $2.75 per hourThe formula applied is:\[ \text{Direct Labor Time Variance} = (600 - 560) \times 2.75 = 110 \]The positive number here denotes additional hours worked beyond what was planned, which might suggest inefficiencies in the production process or unexpected delays.

Standard Direct Labor Cost

The standard direct labor cost serves as a benchmark for what labor costs "should" be under optimal circumstances. It helps establish baseline expectations for labor expenses and is a part of any efficient cost management strategy.For Alpine Bicycle Company, the computation involves multiplying the number of bicycles completed by the standard number of labor hours needed per bicycle, and then by the standard rate:- Bicycles Completed = 280- Standard Hours per Bicycle = 2- Standard Rate = $2.75 per hourCalculate it as follows:\[ \text{Standard Direct Labor Cost} = 280 \times 2 \times 2.75 = 1540 \]This calculated standard cost is essential in identifying variances and determining if labor spending aligns with the set production standards.

Work in Process Accounting

Work in Process (WIP) accounting keeps track of costs related to partially finished goods, offering insights into production efficiency and company resource flow.For recorded entries in WIP, a key piece is the direct labor cost that aligns with established standards. For Alpine Bicycle Company, we use the previously calculated standard direct labor cost:\[ \text{Direct Labor Cost to WIP} = 1540 \]This number gets debited to Work in Process, indicating the cost from production that "flows" into partially completed goods. By maintaining accurate WIP records, companies like Alpine Bicycle can track progress, manage resources, and make informed operational decisions.