Concept explainers
Problem 21-6AA Materials, labor, and
Boss Company’s
Standard direct materials cost……………………………………………. | $ 100.000 |
Direct materials quantity variance (unfavorable)……………………….. | 3.000 |
Direct materials price variance (favorable) ……………………………….. | 500 |
Actual direct labor cost ……………………………………………………. | 90.000 |
Direct labor efficiency variance (favorable) ………………………………. | 7.000 |
Direct labor rato variance (unfavorable). ………………………………….. | 1.200 |
Actual overhead cost ………………………………………………………. | 375.000 |
Volume variance (unfavorable) ……………………………………………. | 12.000 |
Controllable variance (unfavorable)………………………………………….. | 9.000 |
Required
- Prepare December 31 journal entries to record the company’s costs and variances for the month. (Do not prepare the
journal entry to close the variances.) Check (1) Dr. Work in process Inventory (for overhead), $354.000
- Identify the variances that would attract the attention of a manager who uses management by exception. Explain what action (s) the manager should consider.
Analysis Component
1.
To prepare: The journal entries for the given transactions.
Explanation of Solution
The favorable price variance and unfavorable quantity variance charged to raw material inventory.
Date | Account title and explanation | Post ref. | Debit ($) | Credit ($) |
Dec 31 | Goods in process inventory | 100,000 | ||
Direct material quantity variance | 3,000 | |||
Direct material price variance | 500 | |||
Raw material inventory | 102,500 | |||
(To charge favorable price variance and unfavorable quantity variance to raw material inventory ) |
Table (1)
- The goods in process inventory is an asset account and it records an increase with the record of direct material’s cost, hence it is debited.
- The direct material quantity variance is an unfavorable variance, hence it is debited.
- The direct material price variance is a favorable variance, hence it is credited.
- The raw material inventory account is an asset account and as the variances are charged to raw material inventory it is credited.
Working note:
Calculation of the raw material inventory,
The amount charged in raw material inventory account is $102,500.
The favorable labor efficiency variance and unfavorable direct labor rate variance is charged.
Date | Account title and explanation | Post ref. | Debit ($) | Credit ($) |
Dec 31 | Goods in process inventory | 95,800 | ||
Direct labor rate variance | 1,200 | |||
Direct labor efficiency variance | 7,000 | |||
Factory payroll | 90,000 | |||
(To charge favorable labor efficiency variance and unfavorable direct labor rate variance) |
Table (2)
- The goods in process inventory account is an asset account and it records an increase with the amount of difference recorded, hence it is debited.
- The direct labor rate variance is an unfavorable variance, hence is debited.
- The direct labor efficiency variance is a favorable variance, hence is credited.
- The factory payroll account records the amount which is incurred and is to be paid, hence is credited with the actual costs of direct labor.
Working note:
Calculation of the amount to be charged in goods in process inventory,
The amount of goods in process inventory is $95,800.
The unfavorable volume variance and controllable variance is charged to factory overhead.
Date | Account title and explanation | Post ref. | Debit ($) | Credit ($) |
Dec 31 | Goods in process inventory | 354,000 | ||
Volume variance | 12,000 | |||
Controllable variance | 9,000 | |||
Factory overhead | 375,000 | |||
(To charge unfavorable volume and controllable variance to factory overhead) |
Table (3)
- The goods in process inventory is an asset account, it records an increase with the amount of difference to be recorded as the amount of factory overhead, hence is debited.
- The unfavorable volume variance is debited when charged to factory overhead.
- The unfavorable controllable variance is debited when charged to factory overhead.
- The factory payroll account records the amount which is incurred and records the actual incurred overhead cost, hence is credited.
Working note:
Calculation of the amount of goods in process inventory,
The amount of goods in process inventory is $354,000.
2.
The variances that attract the attention of manager using management by exception.
Explanation of Solution
- The management will focus more on unfavorable fixed volume variance which is of $12,000 because there is a significant amount of variance.
- The variance is arising because of the change in the budgeted overhead and applied overhead. The reason for the change in it should be analyzed.
- The total controllable variance is an unfavorable variance of $9,000 and it will also attract the attention of managers.
- This is because the management needs to analyze the reasons for using more amount than the standard quantity.
- The management as per the concept of management by exception focuses more on the unfavorable volume variance, unfavorable controllable variance, and direct material quantity variance.
Hence, the unfavorable fixed volume variance and total controllable variance are the variances that attract the attention of the management as per the management by exception.
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Chapter 21 Solutions
Financial and Managerial Accounting: Information for Decisions
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