Chapter 10, Problem 45P

Aqua float Corporation manufactures rafts for use in swimming pools. The standard cost for material and labor is $89.20 per raft. This includes 8 kilograms of direct material at a standard cost of $5.00 per kilogram, and 6 hours of direct labor at $8.20 per hour. The following data pertain to November:

• Work-in-process inventory on November 1: none.
• Work-in-process inventory on November 30: 800 units (75 percent complete as to labor; material is issued at the beginning of processing).
• Units completed: 5,600 units.
• Purchases of materials: 50,000 kilograms for $249,250.
• Total actual labor costs: $300,760.
• Actual hours of labor: 36,500 hours.
• Direct-material quantity variance: $ 1,500 unfavorable.

Required:

1. 1. Compute the following amounts. Indicate whether each variance is favorable or unfavorable.
   1. a.      Direct-labor rate variance for November.
   2. b.      Direct-labor efficiency variance for November.
   3. c.       Actual kilograms of material used in the production process during November.
   4. d.      Actual price paid per kilogram of direct material in November.
   5. e.       Total amounts of direct-material and direct-labor cost transferred to Finished-Goods Inventory during November.
   6. f.        The total amount of direct-material and direct-labor cost in the ending balance of Work-in-Process Inventory at the end of November.
2. 2. Prepare journal entries to record the following:
3. • Purchase of raw material.
4. • Adding direct material to Work-in-Process Inventory.
5. • Adding direct labor to Work-in-Process Inventory.
6. • Recording of variances.

To determine

Compute the amounts of the given variance and indicate whether each variance is favorable or unfavorable.

Explanation of Solution

Variance: Variance refers to the difference level in the actual cost incurred and standard cost. The total cost variance is divided into separate cost variances; this cost variance indicates that the amount of variance that is attributable to specific casual factors.

1. a. Compute the direct-labor rate variance for the month of November:

$\begin{array}{c}\begin{array}{l}\text{Direct labor}\\ \text{rate variance}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Actual rate}-\\ \text{Standard rate (1)}\end{array}\right)\times \text{Actual production hours}\\ \text{=}\left(\$8.24-\$8.20\right)\times 36,500\text{ hours}\\ \text{=\$1,460 Unfavorable}\end{array}$

Working note (1):

Compute the standard rate:

$\begin{array}{c}\text{Standard rate}=\frac{\text{Total actual labor costs}}{\text{Actual labor hours}}\\ =\frac{\$300,760}{36,500\text{hours}}\\ =\$8.24\end{array}$

1. b. Compute the direct-labor efficiency variance for the month of November:

$\begin{array}{c}\begin{array}{l}\text{Direct labor }\\ \text{efficiency variance }\end{array}\}=\left(\begin{array}{l}\text{Actual hour}-\\ \text{Standard hour (2)}\end{array}\right)\times \text{Standard rate}\\ =\left(\text{36,500 hours}-37,200\text{ hours}\right)\times \$8.20\text{ per hour}\\ =\text{\$5,740 Favorable}\end{array}$

Working note (2):

Calculate the standard labor hours.

Particulars	Units (a)	Rate per hour (b)	Total hours $\left(\text{a}\times \text{b}\right)$
Completed units	5,600 units	6 hours per unit	33,600 hours
Add: Partially completed units $\text{(75\% of 800 units)}$	600	6 hours per unit	3,600 hours
Total standard hours allowed			37,200 hours

Table (1)

1. c. Compute the actual kilograms of material used in the production process:

Compute the direct material quantity variance:

$\begin{array}{c}\begin{array}{l}\text{Direct material}\\ \text{quantity vairance}\end{array}\}=\left[\left(\begin{array}{l}\text{Actual quantity}-\\ \text{Standard quantity}\end{array}\right)\times \left(\text{Standard price}\right)\right]\\ \$1,500\text{ unfavorable}=\left(\text{Actual quantity}-51,200\text{kg}(3)\right)\times \$5.00\\ \text{Actual quantity}=\frac{\$1,500\text{ unfavorable}}{\$5.00}+51,200\\ =\$51,500\text{ kilograms}\end{array}$

Working note (3):

Calculate the standard quantity:

Particulars	Units (a)	Rate per quantity(b)	Total quantity $\left(\text{a}\times \text{b}\right)$
Completed units	5,600 units	8 kilograms	44,800 quantity
Add: Partially completed units	800 units	8 kilograms	6,400 quantity
Total standard hours allowed			51,200 kilograms

Table (2)

1. d. Compute the actual price paid per kilogram of direct material:

$\begin{array}{c}\begin{array}{l}\text{Actual price of}\\ \text{direct material}\end{array}\}=\frac{\text{Material purchased}}{\text{Purchased quantity}}\\ =\frac{\text{\$249,250}}{50,000}\\ =\$4.985\text{ kilogram}\end{array}$

1. e. Compute the direct-material and direct-labor cost transferred to finished goods:

Particulars	Units (a)	Standard cost (b)	Total $\left(\text{a}\times \text{b}\right)$
Direct-material cost transferred	5,600 units	$40$\left(8\text{kg}\times \$\text{5 per kg}\right)$	224,000
Add: Direct-labor cost transferred	5,600 units	$49.20 $\left(\$89.20-\$40\right)$	275,520
Total cost transferred to finished goods		89.20 (given)	499,520

Table (3)

1. f. Compute the total cost of direct-material and direct-labor cost in the ending balance of work-in-process inventory at the end of November:

Particulars	Units (a)	Standard cost (b)	Total $\left(\text{a}\times \text{b}\right)$
Direct-material cost transferred	800 units	$40$\left(8\text{kg}\times \$\text{5 per kg}\right)$	32,000
Add: Direct-labor cost transferred $\text{(75\% of 800 units)}$	600 units	$49.20 $\left(\$89.20-\$40\right)$	29,520
Total cost in endingwork-in-process inventory		89.20 (given)	61,520

Table (4)

To determine

Prepare journal entries to record the given transaction of company A.

Explanation of Solution

Prepare journal entries to record the given transaction of company A as follows:

Date		Particulars	Debit ($)	Credit ($)
	1.	Raw-Material Inventory (4)	250,000
		Direct-Material Purchase Price Variance (6)		750
		Accounts Payable		249,250
		(To record the purchase of raw materials and variance)
	2.	Work-in-Process Inventory (5)	256,000
		Direct-Material Quantity Variance	1,500
		Raw-Material Inventory		257,500
		(To record the direct materials used in the production process)
	3.	Work-in-Process Inventory (7)	305,040
		Direct-Labor Rate Variance	1,460
		Direct-Labor Efficiency Variance		5,740
		Wages Payable		300,760
		(To record the direct labor used in the production process)

Table (5)

Working note (4):

Compute the raw-material inventory:

$\begin{array}{c}\text{Raw material inventory}=\text{Raw material purchased}\times \text{Price per kilogram}\\ =50\text{,000 kilogram}\times \$5.00\\ =\$250\text{,000}\end{array}$

Working note (5):

Calculate the standard quantity:

$\begin{array}{c}\text{Standard quantity}=\text{Total standard units}\times \text{kilogram per unit}\\ =5\text{1,200 (3) units }\times 5\text{ kilogram per unit}\\ =\text{256,000 kilograms}\end{array}$

Calculate the raw-material inventory:

$\begin{array}{c}\begin{array}{l}\text{Raw}-\text{material}\\ \text{Inventory}\end{array}\}=\text{Total standard units}\times \text{kilogram per unit}\\ =5\text{1,500units }\times 5\text{ kilogram per unit}\\ =\text{257,500 kilograms}\end{array}$

Working note (6):

Calculate the direct material purchase price variance:

$\begin{array}{c}\begin{array}{l}\text{Direct mateiral }\\ \text{purchase price variance}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Actual price}-\\ \text{Standard price}\end{array}\right)\times \text{Production quantity}\\ \text{=}\left(\$4.985-\$5.00\right)\times 50,000\text{ units}\\ =\$750\text{ Favorable}\end{array}$

Working note (7):

Calculate the direct labor rate variance:

$\begin{array}{c}\begin{array}{l}\text{Direct labor rate }\\ \text{variance}\end{array}\}=\text{Standard labor hours}\times \text{Direct labor rate per hour}\\ =\$37,200\text{ (2)}\times 8.20\text{ hours}\\ =\text{\$305,040}\end{array}$