Question

Haliburton Mills Inc. is a large producer of men’s and women’s clothing. The company uses standard costs for all of its products. The standard costs and actual costs for a recent period are given below for one of the company’s product lines (per unit of product):

	Standard Cost			Actual Cost
Direct materials:
Standard: 2.0 metres at $3.90 per metre	$	7.80
Actual: 2.4 metres at $3.65 per metre				$	8.76
Direct labour:
Standard: 1.5 hours at $2.50 per hour		3.75
Actual: 1.2 hours at $2.85 per hour					3.42
Variable manufacturing overhead:
Standard: 1.5 hours at $1.10 per hour		1.65
Actual: 1.2 hours at $1.40 per hour					1.68
Fixed manufacturing overhead:
Standard: 1.5 hours at $3.30 per hour		4.95
Actual: 1.2 hours at $3.40 per hour					4.08
Total cost per unit	$	18.15		$	17.94

Actual costs: 9,000 units at $17.94	$	161,460
Standard costs: 9,000 units at $18.15		163,350
Difference in cost—favourable	$	1,890

During this period, the company produced 9,000 units of product. A comparison of standard and actual costs for the period on a total cost basis is also given above.

There was no inventory of materials on hand to start the period. During the period, 21,600 metres of materials was purchased and used in production. The denominator level of activity for the period was 11,140 hours.

Required:

1. For direct materials:

a. Compute the price and quantity variances for the period. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

b. Prepare journal entries to record all activity relating to direct materials for the period.

2. For direct labour:

a. Compute the rate and efficiency variances. (Indicate the effect of variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

b. Prepare a journal entry to record the incurrence of direct labour cost for the period. (List debit entries first).

3. Compute the variable manufacturing overhead spending and efficiency variances. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

4. Compute the fixed overhead budget and volume variances.

Answer 1

1. a.  

Actual Quantity of Inputs, at Actual Price	-	Actual Quantity of Inputs, at Standard Price	Material price variance
(AQ × AP)		(AQ × SP)
21600 meters × $3.65 per metre		21600 meters × $3.90per metre
= $78840		= $84240	5400 F

.

Actual Quantity of Inputs, at Standard Price	-	Standard Quantity Allowed for Output, at Standard Price	Material quantity variance
(AQ × SP)		(SQ × SP)
21600 meters × $3.90per metre		2 * 9 000 meters* × $3.90 per metre
= $84240		= $70200	$14040 U

.

b.	Raw Materials (21600 meters @ $3.90 per metre)............................	$84240
	Materials Price Variance (21600 metres @ $0.25 per metre F)......................................		$5400
	Accounts Payable (21600 metres @ $3.65 per metre).........................................		$78840
	Work in Process (18000 metres @ $3.90 per metre).........................	$70200
	Materials Quantity Variance (3600 metres U @ $3.90 per metre)..............................................	14040
	Raw Materials (21600 metres @ $3.90per metre).....................		$84240

.

2.a.

Actual Hours of Input, at the Actual Rate		Actual Hours of Input, at the Standard Rate	Labor rate variance
(AH × AR)		(AH × SR)
( 1.2 * 9000) hours* × $2.85 per hour		10800 hours × $2.50 per hour
= $30780		= $27000	3780 U

.

Actual Hours of Input, at the Standard Rate		Standard Hours Allowed for Output, at the Standard Rate	Labor efficiency variance
(AH × SR)		(SH × SR)
10800 hours × $2.50 per hour		( 1.5 * 9000) hours** × $2.50 per hour
= $27000		= $33750	$6750 F

.

2. b.

Work in Process (1.5 * 9000 hours @ $2.50 per hour)..............................	33750
Labour Rate Variance (10800 hours @ $0.35 per hour U).................................................	3780
Labour Efficiency Variance (2700 hours F @ $2.50 per hour)..............................................		6750
Wages Payable (10800 hours @ $2.85 per hour).........................		30780

.

3.   

Actual Hours of Input, at the Actual Rate	variable manufacturing overhead spending variance	Actual Hours of Input, at the Standard Rate	variable manufacturing overhead efficiency variance	Standard Hours Allowed for Output, at the Standard Rate
(AH × AR)		(AH × SR)		(SH × SR)
10800 hours × $1.40 per hour		10800 hours × $1.10 per hour		(1.5 *9000) hours × $1.10per hour
= $15120	3240 U	= $11880	2970 F	= $14850

.

4. Compute the fixed overhead budget and volume variances

Actual Fixed Overhead Cost	fixed overhead budget variance	Budgeted Fixed Overhead Cost	fixed overhead volume variances	Fixed Overhead Cost Applied to Work in Process
(1.2 * 9000) hours × $3.40 per hour		11140 hours × $3.30 per hour		13500 × $3.3 per hour
= $36720	42 F	= $36762	$7788 F	= $44550