Question

Evergreen, Inc., has the set the following standards for direct materials and direct manufacturing labor for each 25-lb. bag of chemical fertilizer it produces:

Per Bag

                  Direct Materials: 31.25 pounds of XF/2000 @ $0.10          $3.125

                  Direct Labor: 0.0625 hours @ $40.00 per hour                         2.500

The company had planned to produce 2,000,000 pounds of the fertilizer during February 2018, but manufactured 25% more fertilizer than planned, using 3,375,000 pounds of XF/2000 and 6,500 direct manufacturing labor hours. The company purchased 3,750,000 pounds of XF/2000 at $0.09375 per pound and incurred a total payroll of $227,500 for direct labor during the month. The company uses standard costing, and thus identifies all variances at time incurred (ie: time of purchase, time of use, etc.).

REQUIREMENTS:

Compute all relevant variances for direct costs.

Prepare the journal entries to record the variances (assume purchases made on the 15^th of the month, payroll and requisitions recorded at end of month).

Answer 1

Solution 1:

Material variance:

Actual production of fertlizer (In pound) = 2000000*125% = 2500000 pound

Actual of fertlizer (In bags) = 25000000/25 = 100000 bag

Standard quantity of material for actual production = 100000*31.25 = 3125000 pound

Actual quanitty of material purchased = 3750000 pound

Actual quantity of material used = 3375000 pound

Standard price of material = $0.10 per pound

Actual price of material = $0.09375 per pound

Direct material price variance = (SP - AP) * AQ Purchased = ($0.10 - $0.09375) * 3750000 = $23,437.50 F

Direct material quantity variance = (SQ - AQ) * SP = (3125000 - 3375000) * $0.10 = $25,000 U

Total direct material variance = Material price variance + Material quantity variance

= $23,437.50 F + $25,000U = $1,562.50 U

Direct labor variances:

Standard hours of labor for actual production = 100000*0.0625 = 6250 hours

Actual hours worked = 6500 hours

Standard rate of direct labor = $40 per hour

Actual rate of direct labor = $227,500 / 6500 = $35 per hour

Direct labor rate variance = (SR - AR) * AH = ($40 - $35) * 6500 = $32,500 F

Direct labor efficiency variance = (SH - AH) * SR = (6250 - 6500) * $40 = $10,000U

Total direct labor variance = Direct labor rate variance + Direct labor efficiency variance

= $32,500 F + $10,000 U = $22,500 F

Solution 2:

Journal Entries - Evergreen Inc.
Date	Particulars	Debit	Credit
15-Feb	Raw material inventory Dr (3750000*$0.10)	$375,000.00
	To AccountsPayable (3750000*0.09375)		$351,562.50
	To Direct material price variance		$23,437.50
	(To record purchase of material)
28-Feb	Work In Process Dr (3125000*$0.10)	$312,500.00
	Direct material quantity variance Dr	$25,000.00
	To Raw material inventory (3375000*$0.10)		$337,500.00
	(To record usage of material)
28-Feb	Work In Process Dr (6250*$40)	$250,000.00
	Direct labor efficiency variance Dr	$10,000.00
	To Direct labor rate variance		$227,500.00
	To Factory Wages Payable		$32,500.00
	(To record payroll for the month)