Direct Materials, Direct Labor, and Overhead Variances, Journal Entries Rand Company produces dry fertilizer. At the beginning of the year, Rand had the following standard cost sheet: Direct materials (8 lbs. @ $1.25) $10.00 Direct labor (0.15 hr. @ $18.00) 2.70 Fixed overhead (0.20 hr. @ $3.00) 0.60 Variable overhead (0.20 hr. @ $1.70) 0.34 Standard cost per unit $13.64 Overhead rates are computed using practical volume, which is 49,000 units. The actual results for the year are as follows: Units produced: 53,000 Direct materials purchased: 408,000 pounds at $1.32 per pound Direct materials used: 406,800 pounds Direct labor: 10,500 hours at $17.95 per hour Fixed overhead: $36,570 Variable overhead: $18,000 Required: 1. Compute price and usage variances for direct materials. MPV MUV 2. Compute the direct labor rate and labor efficiency variances. Labor Rate Variance Labor Efficiency Variance 3. Compute the fixed overhead spending and volume variances. Spending Variance Volume Variance 4. Compute the variable overhead spending and efficiency variances. Spending Variance Efficiency Variance 5. Prepare journal entries for the following: The purchase of direct materials The issuance of direct materials to production (Work in Process) The addition of direct labor to Work in Process The addition of overhead to Work in Process The incurrence of actual overhead costs If an amount box does not require an entry, leave it blank. a. Materials Direct Materials Price Variance Accounts Payable b. Work in Process Direct Materials Usage Variance Materials c. Work in Process Direct Labor Efficiency Variance Direct Labor Rate Variance Wages Payable d. Work in Process Variable Overhead Control Fixed Overhead Control e. Variable Overhead Control Fixed Overhead Control Various Accounts f. Prepare journal entries for the closing out of variances to Cost of Goods Sold. Post amounts from highest to lowest. If an amount box does not require an entry, leave it blank. First, close direct materials and direct labor variances: Cost of Goods Sold Direct Materials Usage Variance Direct Labor Rate Variance Direct Labor Efficiency Variance Direct Materials Price Variance Second, recognize the overhead variances: Post amounts from highest to lowest. If an amount box does not require an entry, leave it blank. Variable Overhead Control Fixed Overhead Spending Variance Fixed Overhead Control Fixed Overhead Volume Variance Variable Overhead Efficiency Variance Variable Overhead Spending Variance Third, close the overhead variances: Post amounts from highest to lowest. If an amount box does not require an entry, leave it blank. Fixed Overhead Volume Variance Variable Overhead Efficiency Variance Variable Overhead Spending Variance Cost of Goods Sold Fixed Overhead Spending Variance
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Direct Materials, Direct Labor, and
Rand Company produces dry fertilizer. At the beginning of the year, Rand had the following
| Direct materials (8 lbs. @ $1.25) | $10.00 |
| Direct labor (0.15 hr. @ $18.00) | 2.70 |
| Fixed overhead (0.20 hr. @ $3.00) | 0.60 |
| Variable overhead (0.20 hr. @ $1.70) | 0.34 |
| Standard cost per unit | $13.64 |
Overhead rates are computed using practical volume, which is 49,000 units. The actual results for the year are as follows:
- Units produced: 53,000
- Direct materials purchased: 408,000 pounds at $1.32 per pound
- Direct materials used: 406,800 pounds
- Direct labor: 10,500 hours at $17.95 per hour
- Fixed overhead: $36,570
- Variable overhead: $18,000
Required:
1. Compute price and usage variances for direct materials.
| MPV | |
| MUV |
2. Compute the direct labor rate and labor efficiency variances.
| Labor Rate Variance | |
| Labor Efficiency Variance |
3. Compute the fixed overhead spending and volume variances.
| Spending Variance | |
| Volume Variance |
4. Compute the variable overhead spending and efficiency variances.
| Spending Variance |
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| Efficiency Variance |
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5. Prepare journal entries for the following:
- The purchase of direct materials
- The issuance of direct materials to production (Work in Process)
- The addition of direct labor to Work in Process
- The addition of overhead to Work in Process
- The incurrence of actual overhead costs
If an amount box does not require an entry, leave it blank.
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Materials | ||
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Direct Materials Price Variance | |||
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Accounts Payable | |||
| b. |
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Work in Process | ||
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Direct Materials Usage Variance | |||
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Materials | |||
| c. |
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Work in Process | ||
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Direct Labor Efficiency Variance | |||
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Direct Labor Rate Variance | |||
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Wages Payable | |||
| d. |
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Work in Process | ||
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Variable Overhead Control | |||
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Fixed Overhead Control | |||
| e. |
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Variable Overhead Control | ||
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Fixed Overhead Control | |||
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Various Accounts |
f. Prepare journal entries for the closing out of variances to Cost of Goods Sold. Post amounts from highest to lowest. If an amount box does not require an entry, leave it blank.
First, close direct materials and direct labor variances:
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Cost of Goods Sold | |||
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Direct Materials Usage Variance | |||
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Direct Labor Rate Variance | |||
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Direct Labor Efficiency Variance | |||
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Direct Materials Price Variance |
Second, recognize the overhead variances:
Post amounts from highest to lowest. If an amount box does not require an entry, leave it blank.
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Variable Overhead Control | |||
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Fixed Overhead Spending Variance | |||
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Fixed Overhead Control | |||
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Fixed Overhead Volume Variance | |||
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Variable Overhead Efficiency Variance | |||
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Variable Overhead Spending Variance |
Third, close the overhead variances:
Post amounts from highest to lowest. If an amount box does not require an entry, leave it blank.
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Fixed Overhead Volume Variance | ||
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Variable Overhead Efficiency Variance | ||
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Variable Overhead Spending Variance | ||
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Cost of Goods Sold | ||
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Fixed Overhead Spending Variance |
Direct Material-
Direct material refers to the unprocessed materials that are directly used in the production procedure of goods and/or services of a corporation and are an essential element of the finished goods manufactured. Direct Material Costs are reported in the trading account debit side under the head “cost of goods sold.” They are also referred to as the expenditures incurred to create a particular product that can mark out back to its creative structure.
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