Question

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)	22.00
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.

Direct materials	$
Direct labor	$

2. Compute the total budget variances for direct materials and direct labor.

Direct materials	$
Direct labor

3. Break down the total budget variance for direct materials into a price variance and a usage variance.

Materials Price Variance	$
Materials Usage Variance	$

Prepare the journal entries associated with these variances. If an amount box does not require an entry, leave it blank or enter "0".

Price Variance
Usage Variance

4. Break down the total budget variance for direct labor into a rate variance and an efficiency variance.

Labor Rate Variance	$
Labor Efficiency Variance	$

Prepare the journal entries associated with these variances. If an amount box does not require an entry, leave it blank or enter "0".

Answer 1

1.
Direct Material = 9500 x $4.20 = $39900
Direct Labor = 9500 x $22 = $209000

2. Total Budget Variance = Actual Costs - Budgeted Costs
Direct Material = 14150 x 2.74 - 39900 = $1129 (F)
Direct Labor = 10570 x 19.60 - 209000 = $1828 (F)

3.
Material Price Variance = (Actual Price - Standard Price) x Actual Quantity
= ($2.74 - 2.80) x 14150 = $849 (F)

Material Usage Variance = (Actual Quantity - Standard Quantity) x Standard Price
= (14150 - 9500 x 1.5) x 2.80 = $280 (F)

Material Price Variance

Account Titles	Debit	Credit
Material Inventory	$         39,620
Material Price Variance		$               849
Accounts Payable		$         38,771

Material Usage Variance

Account Titles	Debit	Credit
Work in Process Inventory	$         39,900
Material Usage Variance		$               280
Material Inventory		$         39,620

4.
Labor Rate Variance = (Actual rate - Standard rate) x Actual hours
= ($19.60 - 20) x 10570 = $4228 (F)

Labor Efficiency Variance = (Actual hours - Standard hours) x Standard Rate
= (10570 - 9500 x 1.1) x $20 = $2400 (U)

Account Titles	Debit	Credit
Work in Process Inventory	$       209,000
Labor Efficiency Variance	$            2,400
Labor Rate Variance		$            4,228
Wages Payable		$       207,172