Question

1. Harrod Fashions began production of a new product on June 1. The company uses a standard cost system and has established the standards indicated in Table 1 for the new product.

Table 1
	Std. quantity or hours	Std. price or rate	Standard cost
Direct materials	2.2 yds	$18 per yd	$39.60
Direct labor	2.6 hrs	10 per hr	26.00

     During June, the following activity was recorded relative to the new product:

1. Purchased 10,000 yards of material at a total cost of $172,000.
2. Produced 3,000 new units of product during the month. Also noted that the beginning and ending inventory of raw material was 2,000 and 5,000 yards, respectively.
3. Production reported that 7,500 hours of labor time was worked directly on the product; the cost of this labor time was $82,500.

1) For materials, compute the material price variance and material quantity variance.

2) For labor, compute the labor rate variance and labor efficiency variance.

3) Prepare the journal entries to record (a) the purchase of raw materials, (b) use of raw materials in production, and (c) incurrence of direct-labor cost for the month.

Answer 1

1.Calculation of Material price Variance and Material Quantity Variance

Material price Variance

Material price variance = AQ( AP-SP)

Where AQ= Actual Quantity, AP= Actual Price and SP= Standard Price

Given, AQ= 10,000 Yards

            AP= $ 172000/10000

                = $ 17.2 per yard

            SP= $ 18 per yard

Material Price variance = 10000(17.20-18)

                                       =8000 (Favourable)

Note:-Since Actual price is less than the standard price, variance is favourable

Material Quantity Variance

Material Quantity Variance = SP(AQ-SQ)

Where SP=Standard Price, AQ=Actual Quantity, SQ= Standard Quantity for Actual units produced

SP= $ 18 per yard

AQ= 7000 yards

(Calculation of AQ

Opening Inventory = 2000, Purchase = 10000 Closing Inventory= 5000,

AQ= Opening Inventory+ Purchase-Closing Inventory

     = 2000+10000-5000

    = 7000)

SQ= 2.2 (3000) – where 3000 is the actual units produced

     = 6600 yards

Material Quantity Variance = 18(7000-6600)

                                                =7200(Unfavourable)

Since Actual Quantity used is more than the standard quantity, the variance is unfavourable

2)Labour Rate Variance and Labour efficiency variance

Labour Rate Variance

Labour Rate Variance = AH( AR-SR)

Where AH= Actual Hours, AR= Actual Rate per hour, SR= Standard Rate per hour

AH= 7500

AR= $82500/7500

     =$ 11 Per Hour

SR=$ 10 Per Hour

Labour Rate Variance = 7500(11-10)

                                    =7500 (Unfavourable)

Note:-Since actual rate is higher than the standard rate, variance is unfavourable

Labour Efficiency Variance

Labour Efficiency Variance = SR( AH-SH)

Where SR= Standard Rate, AH= Actual Hours, SH= Standard Hours for actual quantity produced

SR=$ 10 Per Hour

AH= 7500

SH= 3000(2.6) where-3000 is the actual quantity produced

    = 7800

Labour Efficiency Variance = 10 (7500-7800)

                                              = 3000 (Favourable)

Note:-Since actual hours spent is less than the standard hours, the variance is favourable

3) Journal Entries

Purchase of Raw Material

Raw Material A/c Dr.                          172000

            To Cash/Accounts Payable                                        172000

Use of Raw Materials in Production

Work in Process A/c Dr.                                 120400

            To Raw Material A/c                                                   120400

(172000/10000*7000)