Question

James Company manufactures t-shirts. During the year, it manufactured 250,000 t-shirts, using 2 hours of direct labor at a rate of $8.50 per hour. The materials and labor standards for manufacturing the t-shirts are:

Direct materials (6 yards of fabric @ $3 per yard)	$18
Direct labor (2.4 hours @ $8.00 per hour)	17

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It took James 1,400,000 yards at $2.50 per yard to make the 250,000 t-shirts.

What is the entry to record the purchase of materials?

	a.	debit Materials, 4,200,000 debit Materials Price Variance, 750,000 credit Accounts Payable, 4,950,000
	b.	debit Materials, 4,200,000 credit Materials Price Variance, 700,000 credit Accounts Payable, 3,500,000
	c.	debit Materials, 3,500,000 credit Materials Price Variance, 700,000 credit Accounts Payable, 4,200,000
	d.	debit Materials, 3,500,000 debit Materials Price Variance, 750,000 credit Accounts Payable, 4,250,000

Answer 1

• Correct Answer = Option ‘B’

Accounts Titles	Debit	Credit
Raw material Inventory	$                                            4,200,000.00
Material Price variance		$      700,000.00
Accounts payable		$ 3,500,000.00

• Working

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                                3.00	-	$                       2.50	)	x	1400000
	700000
	Variance		$          700,000.00			Favourable-F