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Homework answers / question archive / Standard Costs, Decomposition of Budget Variances, Direct Materials and Direct Labor Haversham Corporation produces dress shirts
Standard Costs, Decomposition of Budget Variances, Direct Materials and Direct Labor
Haversham Corporation produces dress shirts. The company uses a standard costing system and has set the following standards for direct materials and direct labor (for one shirt):
Fabric (1.5 yds. @ $2.80) $4.20
Direct labor (1.1 hr. @ $20) $22
Total prime cost $26.20
During the year, Haversham produced 9,500 shirts. The actual fabric purchased was 14,150 yards at $2.74 per yard. There were no beginning or ending inventories of fabric. Actual direct labor was 10,570 hours at $19.60 per hour.
Required:
1) Compute the costs of fabric and direct labor that should have been incurred for the production of 9,500 shirts.
2) Compute the total budget variances for direct materials and direct labor.
3) Break down the total budget variance for direct materials into a price variance and a usage variance. Prepare the journal entries associated with these variances.
4) Break down the total budget variance for direct labor into a rate variance and an efficiency variance. Prepare the journal entries associated with these variances.
1) Direct materials = 9,500 * $4.20
= $39,900
Direct labor = 9,500 * $22
= $209,000
2) Computation of the total budget variance for direct materials:-
Total budget variance = Actual cost - Planned cost
= (14,150 * $2.74) - (9,500 * $4.20)
= $38,771 - $39,900
= $1,129 (F)
Computation of the total budget variance for direct labor:-
Total budget variance = Actual cost - Planned cost
= (10,570 * $19.60) - (9,500 * $22)
= $207,172 - $209,000
= $1,828 (F)
3) Computation of the material price variance:-
Materials price variance = (Actual unit cost - Standard unit cost) * Actual quantity purchased
= ($2.74 - $2.80) * 14,150
= $0.06 * 14,150
= $849 (F)
Computation of the material usage variance:-
Materials usage variance = (Actual quantity - Standard quantity) * Standard price
= (14,150 - (9,500 * 1.5)) * $2.80
= (14,150 - 14,250) * $2.80
= 100 * $2.80
= $280 (F)
| Journal entry:- | ||||
| Account titles | Debit | Credit | ||
| Price Variance | Materials | 39620 | (14150*2.80) | |
| Direct Materials Price Variance | 849 | |||
| Accounts Payable | 38771 | (39620-849) | ||
| Usage Variance | Work in Process | 39900 | (9500*1.5*2.80) | |
| Direct Materials Usage Variance | 280 | |||
| Materials | 39620 | (39900-280) |
4) Computation of the labor rate variance:-
Labor rate variance = (Actual cost - Standard cost) * Actual Hours
= ($19.60 - 420) * 10,570
= $0.40 * 10,570
= $4,228 (F)
Computation of the labor efficiency variance:-
Labor efficiency variance = (Actual hours - Standard hours) * Standard rate
= (10,570 - (9,500 * 1.1)) * $20
= (10,570 * 10,450) * $20
= 120 * $20
= $2,400 (U)
| Journal entry:- | |||
| Account titles | Debit | Credit | |
| Work in process | 209000 | (9500*1.1*20) | |
| Direct labor efficiency variance | 2400 | ||
| Direct labor rate variance | 4228 | ||
| Wages payable | 207172 | (209000+2400-4228) |
