In: Accounting
Wasabi Pte Ltd makes separate journal entries for all cost accounting-related activities. It uses a standard costing system for all manufacturing items. For the month of April 2016, the following activities have taken place:
Actual Direct Manufacturing Materials Purchased $300,000
Direct Manufacturing Materials Used At Standard Price 250,000
Direct Materials Price Variance 10,000 Unfavourable
Direct Materials Efficiency Variance 15,000 Favourable
Direct Manufacturing Labour Rate Variance 6,000 Favourable
Direct Manufacturing Labour Efficiency Variance 4,000
Unfavourable
Direct Manufacturing Labour Payable 172,000
The estimated fixed overhead costs for 2016 is $324,000. The company uses direct labour hours for fixed overhead allocation and anticipates 10,800 hours during the year for 540,000 units. An equal number of units are budgeted for each month. During April 2016, 48,000 units were produced and $28,000 was spent on fixed overhead.
Required:
i. Describe how the above is tracked through the accounting
system by posting the necessary journal entries to record all
direct cost variances for the month.
ii. Calculate all fixed overhead variances for April 2016
Journal Entry to record Material Price Variance
Material Control A/c Dr. Std. Rt.*Actual Quantity
Material Price Variance Dr./Cr.
To, Creditor Actual rate*Actual Quantity
Since Material Price variance is unfavourable that means that material is been purchased over standard rate.
Material Control A/c Dr. 250,000
Material Price Variance Dr. 10,000
To, Creditor (b/f) 260,000
.(Being Variance for actual quanity used recorded.)
Actual Quantity @ standard price =250,000 (Given)
Actual Quantity @ actual price = 260,000 (Balancing Figure)
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Material Price variance (SP-AP)AQ = 10,000 (UF)
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Journal Entry to record Material Efficiency Variance
Work in Progress Dr. Std. Qty. for* S.R.
To, Material Efficiency Variance b.f.
To, Material Control A/c A.Q.*S.R
Since Material Efficiency variance is favourable that means that material is been used below standard Qty.
Work in Progress Dr. 265,000
To, Material Efficiency Variance 15,000
To, Material Control A/c 250,000
.(Being Variance for used quantity recorded recorded.)
Standard Quantity at standard Price = 265,000 (B/F)
Actual Quantity at Standard Price = 250,000 (GIVEN)
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Material Efficiency Variance (SQ-AQ)SP = 15,000 (F)
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Student May take a note between the difference of Actual Quantity purchased and actual Quantity used. Variance is recorded on the quantity used by comparing it with Standard quantity and std. rate.
Journal Entry to record Labour Rate Variance
Labour Control Dr. Std. R.*Actual hours
Labour rate Variance b.f.
To, wages payable A/c AR.*Act. hours
Since Labour rate variance is favourable that means that labour can be procured at lower rate
Labour Control Dr. 178,000
To, Labour rate Variance 6,000
To, Wages payable A/c 172,000
Actual hours @ standard rate =178,000 (b/f)
Actual hours @ actual rate = 172,000 (Given)
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Labour Rate variance (SR-AR)AH = 6,000 (F)
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Journal Entry to record Labour Efficiency Variance
Work in Progress Dr. Std. Hrs. *Std. Rate
Labour Eff. Variance b.f.
To, Labour Control A/c Std. R.*Actual hours
Since Labour efficiency variance is unfavourable that means that labour has taken more hours than it should be.
Work in Progress Dr. 174,000
Labour Eff. Variance 4,000
To, Labour Control A/c 178,000
Standard hours @ standard rate =174,000 (b/f)
Actual hours @ standard rate =178,000 (calculated)
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Labour Rate variance (SH-AH)SR = 4,000 (UF)
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Fixed Overhead Variance
Budgeted Fixed Overhead = Yearly cost =$324,000
45000 unit (540000/12) per month in 900 hours (10800/12) per month.
Fixed Overhead Allocation is on Direct Labour Hour basis
So, Standard FOH/Hour = $324,000/10800 =$30/hour
Fixed Overhead Absorption rate per unit of output = $324,000/540,000 =$0.6/unit
So, Budgeted Fixed Overhead for April 2016= 30*900 = $27,000
Actual production = 48000 units
Actual Over Head = $28,000
Standard Hour for Standard Output (Budget) = 900
Standard Hour for Actual Output (Standard) = 960
Fixed Overhead Total Variance =Actual Fixed OH - Absorbed Fixed OH
= Actual FOH- Actual Output * FOAR
FOAR - Fixed Overhead absorption rate per unit of output
FOTV = $28,000-48000*0.6 = 800 (Favourable)
Fixed Overhead Expenditure Variance
Actual Production | $28,000 |
Less: Budgeted Fixed Overheads | $27,000 |
Variance | $1,000 Adverse |
Fixed Overhead Volume Variance
Budgeted Production | $27,000 |
Less: Absorbed Fixed Overheads | $28,800 |
Variance | $1,800 Favourable |
Fixed Overhead Capacity Variance
Fixed Overhead Capacity Variance calculates the variation in absorbed fixed production overheads attributable to the change in the number of manufacturing hours (i.e. labor hours or machine hours) as compared to the budget.
The variance can be calculated as follows:
Fixed Overhead Capacity Variance:
= (budgeted production hours - actual production hours) x FOAR*
* Fixed Overhead Absorption Rate / unit of hour
Fixed Overhead Efficiency Variance
Fixed Overhead Efficiency Variance calculates the variation in absorbed fixed production overheads attributable to the change in the manufacturing efficiency during a period (i.e. manufacturing hours being higher or lower than standard ).
The variance can be calculated as follows:
Fixed Overhead Efficiency Variance:
= (standard production hours - actual production hours) x FOAR*
* Fixed Overhead Absorption Rate / unit of hour
We are not provided with actual production hours, so we can not calculate these variances.
Note:
The sum of the above two variances should equal to the volume variance.
(Fixed OH Volume Variance = Fixed OH Capacity variance + Fixed OH Efficiency Variance)
Fixed OH Total variance = Fixed OH Expenditure Variance + Fixed OH Volume Variance
800 F = 1000 A + 1800 F