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Question

Computing and journalizing standard cost variances

Middleton manufactures coffee mugs that it sells to other companies for customizing with their own logos. Middleton prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:

Direct Materials (0.2 lbs. @ $0.25 per lb.) $ 0.05

Direct Labor (3 minutes @ \(0.14 per minute) 0.42

Manufacturing Overhead:

Variable (3 minutes @ \)0.06 per minute) \( 0.18

Fixed (3 minutes @ \)0.13 per minute) 0.39 0.57

Total Cost per Coffee Mug \( 1.04

Actual cost and production information for July 2018 follows:

a. There were no beginning or ending inventory balances. All expenditures were on account.

b. Actual production and sales were 62,500 coffee mugs.

c. Actual direct materials usage was 11,000 lbs. at an actual cost of \)0.17 per lb.

d. Actual direct labor usage of 197,000 minutes at a cost of \(33,490.

e. Actual overhead cost was \)10,835 variable and \(29,965 fixed.

f. Selling and administrative costs were \)130,000.

Requirements

1. Compute the cost and efficiency variances for direct materials and direct labor.

2. Journalize the purchase and usage of direct materials and the assignment of direct

labor, including the related variances.

3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production from Work in Process Inventory. Journalize the adjusting of the Manufacturing Overhead account.

5. Middleton intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?

Step-by-Step Solution

Verified

Answer

Direct material cost variance and direct material efficiency variances depict a favourable balance.
Wages payable = $33,490
Variable overhead cost variance and fixed overhead volume variance depict a favourable balance
Fixed overhead cost variance = $6,643
Middleton made a poor choice by hiring more skilled direct labourers.

1Step 1: Meaning of WIP Inventory

Work-in-process (WIP) depicts a stock thing that’s only somewhat finished. On the off chance that the company is manufacturing tangible products instead of rendering services, the value of that mostly completed stock may moreover show up on the balance sheet as the product in the process.

2Step 2: (1) computing the cost and efficiency variances

Direct material cost variance

$\begin{matrix} Direct material cost variance = Actual quantity \times Actual price - Actual quantity \times Standard price \\ =Actual quantity \times (Actual price - Standard price) \\ = 11, 000 \times ($ 0.17 - $ 0.25) \\ = $ 880 Favourable \end{matrix}$

Direct material efficiency variance

$\begin{matrix} Standard quantity = Standard quantity per unit \times Actual production \\ = 0.20 \times 62, 500 \\ = 12, 500 \end{matrix}$

$\begin{matrix} Direct material efficiency variance = (Actual quantity - Standard quantity) \times Standard price \\ = (11, 000 - 12, 500) \times $ 0.25 \\ = $ 375 Favourable \end{matrix}$

Direct labor cost variance

$\begin{matrix} Actual rate = \frac{Actual rate}{Actual direct labor usage} \\ = \frac{$ 33, 490}{197, 000} \\ = $ 0.17 \end{matrix}$

$\begin{matrix} Direct labor cost variance = Actual cost - Standard cost of Actual cost \\ = $ 33, 490 - (197, 000 \times $ 0.14) \\ = $ 5, 910 Unfavourable \end{matrix}$

Direct labor efficiency variance

$\begin{matrix} Standard time allowed = Standard minutes \times Actual production \\ = 3 \times 62, 500 \\ = 187, 000 \end{matrix}$

$\begin{matrix} Direct labor efficiency variance = (Actual hours \times Standard rate) - (Standard hours \times Standard rate) \\ = (197, 000 \times $ 0.14) - (187, 500 \times $ 0.14) \\ = $ 1, 330 Unfavourable \end{matrix}$

3Step 3: (2) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Direct material inventory	2,750
	Accounts payable $(11, 000 \times $ 0.17)$		1,870
	Direct materials price variance		880

	Work-in-progress inventory	3,125
	Direct materials efficiency variance		375
	Raw materials Inventory		2,750

Journal entries to record labour transaction

Date	Particulars	Debit ($)	Credit ($)
	Work-in-process inventory	26,250
	Direct labor cost variance	5,910
	Direct labor efficiency variance	1,330
	Wages payable		33,490

4Step 4: (3) Computing the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances

Variable overhead efficiency variance

$\begin{matrix} Variable overhead efficiency variance = (Actual quantity - Standard quantity) \times Standard cost \\ = (197, 000 - 187, 500) \times $ 0.06 \\ = $ 570 Unfavourable \end{matrix}$

Variable overhead cost variance

$\begin{matrix} Variable overhead cost variance = Actual cost - (Actual hours \times Standard price) \\ = $ 10, 835 - (197, 000 \times $ 0.06) \\ = $ 985 Favourable \end{matrix}$

Allocated fixed overhead

$\begin{matrix} Allocated fixed overhead = Standard fixed overhead allocation rate \times Standard quantity \\ = $ 0.13 \times 3 \times 62, 500 \\ = $ 24, 375 \end{matrix}$

Fixed overhead cost variance

$\begin{matrix} Fixed o v e r h e a d cost v a r i a n c e = Actual fixed overhead - Budgeted fixed overhead \\ = $ 29, 965 - $ 23, 222 \\ = $ 6, 643 Unfavourable \end{matrix}$

Fixed overhead volume variance

$\begin{matrix} Fixed overhead volume variance = Budgeted fixed overhead - Allocated fixed overhead \\ = $ 23, 322 - $ 24, 375 \\ = $ 1, 053 Favourable \end{matrix}$

5Step 5: (4) Preparing journal entries

Date	Particulars	Debit ($)	Credit ($)
	Manufacturing overhead $($ 29, 965 + $ 10, 835)$	40,800
	Various accounts		40,800

	Work-in-process inventory $(62, 500 \times $ 0 .57)$	35,625
	Manufacturing overhead		35,625

	Finished goods inventory $(62, 500 \times $ 1 .04)$	65,000
	Work-in-process inventory		65,000

	Fixed overhead cost variance	6,643
	Variable overhead efficiency variance	570
	Variable overhead cost variance		985
	Fixed overhead volume variance		1,053
	Manufacturing overhead		5,175

6Step 6: (5) Explaining the decision that affects cost variance.

The rate of skilled people employed by MT Company is high. Actual labour costs per minute are $0.17, which is more than the average rate of $0.14. Higher actual costs resulted, which is not advantageous to the company.

Additionally, efficient work is anticipated to be produced by skilled individuals. Nevertheless, the actual hours used (197,000) exceeded the permitted hours (187,500).

The outcome of the decision was foolish, and the unfavourable variance shows that the business could not manage expenditures within the acceptable range.

The MT Company's choice to hire more skilled personnel led to a $3,940 unfavourable change in direct labour costs.

The direct labour efficiency variation also had a negative impact of $1,045.

Overall, the decision MT Company made was unwise.

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