Question

1. Aquella Company produces towels for hotels. The following standards to produce a large towel have been established:

Direct materials (2.2 kilograms @ $6.30)	$13.86
Direct labour (1.5 hour @ $16.60)	$24.90
Standard prime cost for each large towel	$38.76

During the year, 72 000 kilograms of material were purchased and used for manufacturing 30 000 large towels, with the following actual prime costs:

Direct materials	$436 000
Direct labour	$775 770 (for 44 900 hours)

Required:

i. Compute the material and labor price and efficiency variances. Indicate if the variance is favorable (F) or unfavorable (U).

2. Prepare the journal entry for the purchase of raw materials.
3. Prepare the journal entry for the issuance of raw materials.
4. Prepare the journal entry for the closing of material variances to Cost of Goods Sold.

Answer 1

Std qty = 2.2*30000 = 66000
Std price = 6.30
Actual qty = 72000
Actual price = 436000/72000 =6.06
Material price variance = Actual qty*Std price - Actual material cost
		72000*6.30 - 436000 = 17600 Fva
Material qty variance = Std price (Std qty- Actual qty)
		6.30 (66000-72000) = 37800 Unfav
Std Labor hours = (30000*1.50)= 45000
Std rate = 16.60
Actual labor hours = 44900 hrs
Actual labor cost = 775770
Labor rate variance = Actual hrs* Sstd rate - Actual labor cost
		44900*16.60 - 775770 = 30430 unfav
Labor efficiency variance = Std rate (Std hours - Actual hours)
		16.60 (45000-44900) = 1660 Fav
Journal entries:
S.no.	Accounts title and explanation				Debit $	Credit $4
a.	Raw material inventory (72000*6.30)				453600
	Accounts payable					436000
	Material price variance					17600
b.	Work in process inventory (66000*6.30)				415800
	Material Qty variance				37800
	Raw material inventory					453600
c.	Cost of goods sold				37800
	Material Qty variance					37800
	Material price variance				17600
	Cost of good ssold					17600