7.29 Price and efficiency variances, journal entries. The Schuyler Corporation manufactures lamps. It has set up the following standards per finished unit for direct materials and direct manufacturing labor:
Direct materials: 10 lb. at $4.50 per lb. |
$45.00 |
Direct manufacturing labor: 0.5 hour at $30 per hour |
15.00 |
The number of finished units budgeted for January 2017 was 10,000; 9,850 units were actually produced.
Actual results in January 2017 were as follows:
Direct materials: 98,055 lb. used |
|
Direct manufacturing labor: 4,900 hours |
$154,350 |
Assume that there was no beginning inventory of either direct materials or finished units.
During the month, materials purchased amounted to 100,000 lb., at a total cost of $465,000. Input price variances are isolated upon purchase. Input-efficiency variances are isolated at the time of usage.
Required:
SOLUTION
(30 min.) Price and efficiency variances, journal entries.
Actual Costs Incurred (Actual Input Qty. × Actual Price) |
Actual Input Qty. × Budgeted Price |
Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) |
|
Direct Materials |
(100,000 × $4.65a) $465,000 |
Purchases Usage (100,000 × $4.50) (98,055 × $4.50) $450,000 $441,248 |
(9,850 × 10 × $4.50) $443,250 |
$15,000 U Price variance
$2,002 F Efficiency variance
Price variance Efficiency variance
Direct Manufacturing Labor |
(4,900 × $31.5b) $154,350 |
(4,900 × $30) $147,000 |
(9,850 × 0.5 × $30) or (4,925 × $30) $147,750 |
$7,350 U $750 F
Price variance Efficiency variance
a $465,000 ÷ 100,000 = $4.65
b $154,350 ÷ 4,900 = $31.5
Direct Materials Price Variance 15,000
Accounts Payable or Cash Control 465,000
Work-in-Process Control 443,250
Direct Materials Control 441,248
Direct Materials Efficiency Variance 2,002
Work-in-Process Control 147,750
Direct Manuf. Labor Price Variance 7,350
Wages Payable Control 154,350
Direct Manuf. Labor Efficiency Variance 750
A key point in this problem is that all of these efficiency variances are likely to be insignificant. They are so small as to be nearly meaningless. Fluctuations about standards are bound to occur in a random fashion. Practically, from a control viewpoint, a standard is a band or range of acceptable performance rather than a single-figure measure.
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