Question

ABC Company produces a chemical. At the start of the year, they had the following cost information:

Direct material: (10 pounds @ $1.60)	$16.00
Direct labor: (0.75 hours @ $18.00)	$13.50
Variable overhead: (0.75 @ $4.00)	$3.00
Fixed overhead: (0.75 @ $3.00)	$2.25
Standard cost per unit	$34.75

ABC Company computes its overhead rates using practical volume, which is 72,000 units. The actual results are as follows:

a. Units produced: 70,000.

b. Direct materials purchased: 744,000 pounds @ $1.50 per pound.

c.   Direct materials used: 736,000 pounds.

d. Direct labor: 56,000 hours @ $17.90 per hour.

e. Fixed overhead: $214,000

f.   Variable overhead: $175,400

Required: You must show all your calculations for question 1 (below) to get credit.

1. Calculate all the following variances:

a. Direct materials price and efficiency variances.

b. Direct labor price and efficiency variances.

c.   Variable overhead price and efficiency variances.

d. Fixed overhead price and efficiency variances.

2. Record all the necessary journal entries for:

a. Materials purchases.

b. Materials used in production.

c.   Direct labor costs incurred in production.

d. Actual variable overhead costs incurred.

e. Variable overhead costs applied.

f.   Actual fixed overhead costs incurred.

g. Fixed overhead costs applied.

h. Recognition of variable overhead variances.

i.    Recognition of fixed overhead variances.

j.    Closing of all the variance accounts

Answer 1

1. Calculate the variances:

a. Direct materials price and efficiency variances.

Direct materials price Variance = (Standard Price of Material - Actual Price of material) x Actual Quantity of

Material Used

    = ( $ 1.60 - $ 1.50 ) x 736000 Pounds

= ( $ 0.10 ) x 736000

= 73600 Favourable

Direct materials Efficency Variance = (Standard Quantity of Material Used - Actual Quantity of Material Used)

X Actual Price of material

= [ (72000 Units x 10 pounds) - 736000 Pounds ] x $ 1.50

= 24000 Adverse

b. Direct labor price and efficiency variances.

Direct labor price Variance = (Standard Price of labor - Actual Price of labor) x Actual hours of labor

= ( $ 18 - $ 17.90) x 56000 hours

= 5600 Favourable

Direct labor Efficency Variance = (Standard hours of labor - Actual hours of lobor)

X Actual Price of labor

=[ (0.75 hous x 72000 units) - 56000 hours) x $ 17.90

= 35800 Adverse

c.   Variable overhead price and efficiency variances.

Variable Overhead price Variance = (Standard Price of Variable Overhead  - Actual Price of Variable Overhead)   

X Actual hours of labor

   = [ $ 4 - ($ 175400 / 56000 hours) ] x 56000 hours

= 48600 Favorable

Variable Overhaed Efficency Variance = (Standard hours of labor - Actual hours of lobor)

X Actual Price of Variable Overhead

= [ (0.75 hous x 72000 units) - 56000 hours) x $ 175400 / 56000 hours

= 6265 Adverse

d. Fixed overhead price and efficiency variances.

Fixed Overhead price Variance = (Standard Price of Fixed Overhead  - Actual Price of Fixed Overhead)   

X Actual hours of labor

   = [ $ 3 - ($ 214000 / 56000 hours) ] x 56000 hours

= 46000 Adverse

Variable Overhaed Efficency Variance = (Standard hours of labor - Actual hours of lobor)

X Actual Price of Variable Overhead

= [ (0.75 hours x 72000 units) - 56000 hours) x $ 214000 / 56000 hours

= 7645 Adverse

2. Journal entries

a. Materials purchases.

	DEBIT	CREDIT
Material Control Account	$ 1042400
Material Price variance Account	$ 73600
To Creditors / Cash & Bank Account		$1116000

b. Materials used in production.

	DEBIT	CREDIT
WIP Control Account	$ 1152000
To Material Usage Account		$ 24000
To Material Control Account		$ 1128000

c.   Direct labor costs incurred in production.

	DEBIT	CREDIT
WIP Control Account	$ 972200
Labor Efficiency Account	$ 35800
To Wages Control Account		$1008000

d. Actual variable overhead costs incurred.

	DEBIT	CREDIT
WIP Control Account	$ 216000
To Overhead Cost variance Account		$ 40600
To Cash & Bank Account		$175400

e. Variable overhead costs applied.

	DEBIT	CREDIT
WIP Control Account	$ 175400
To Variable Overhead Cost Account		$ 175400

f.   Actual fixed overhead costs incurred.

	DEBIT	CREDIT
WIP Control Account	$ 162000
Overhead Cost variance Account	$ 52000
To Cash & Bank Account		$ 214000

g. Fixed overhead costs applied.

	DEBIT	CREDIT
WIP Control Account	$ 214000
To Fixed Overhead Cost Account		$ 214000