Question

Closing the Balances in The Variance Accounts at the End of the Year

Yohan Company has the following balances in its direct materials and direct labor variance accounts at year-end:

	Debit	Credit
Direct Materials Price Variance	$13,850
Direct Materials Usage Variance		$1,110
Direct Labor Rate Variance		830
Direct Labor Efficiency Variance	$12,700

Unadjusted Cost of Goods Sold equals $1,550,000, unadjusted Work in Process equals $276,000, and unadjusted Finished Goods equals $280,000.

Required:

1. Assume that the ending balances in the variance accounts are immaterial and prepare the journal entries to close them to Cost of Goods Sold. Note: Close the variances with a debit balance first. If an amount box does not require an entry, leave it blank or enter "0".

	Cost of Goods Sold
	Direct Materials Price Variance
	Direct Labor Efficiency Variance
	Close variances with debit balance
	Direct Materials Usage Variance
	Direct Labor Rate Variance
	Cost of Goods Sold
	Close variances with credit balance

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Companies must restate costs and inventories at the end of the year to actual cost. So, variance accounts must be closed out and their balances applied to Cost of Goods Sold (if immaterial) or prorated among Cost of Goods Sold, Work in Process, and Finished Goods.

What is the adjusted balance in Cost of Goods Sold after closing out the variances?

$

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Companies must restate costs and inventories at the end of the year to actual cost. So, variance accounts must be closed out and their balances applied to Cost of Goods Sold (if immaterial) or prorated among Cost of Goods Sold, Work in Process, and Finished Goods.

2. What if any ending balance in a variance account that exceeds $9,000 is considered material? (a) Close the immaterial variance accounts to Cost of Goods Sold. (b) Prorate the largest of the labor variances among Cost of Goods Sold, Work in Process, and Finished Goods on the basis of prime costs in these accounts. (c) Prorate the largest of the material variances among Cost of Goods Sold, Work in Process, and Finished Goods on the basis of prime costs in these accounts. The prime cost in Cost of Goods Sold is $1,060,000, the prime cost in Work in Process is $166,000, and the prime cost in Finished Goods is $133,000. If an amount box does not require an entry, leave it blank or enter "0".

Note: Round all interim calculations to three decimal places, and round your final answers to the nearest dollar. Adjust credit entry for rounding to ensure debits equal credits in journal entry.

(a)	Direct Materials Usage Variance
	Direct Labor Rate Variance
	Cost of Goods Sold
(b)	Work in Process
	Finished Goods
	Cost of Goods Sold
	Direct Labor Efficiency Variance
(c)	Work in Process
	Finished Goods
	Cost of Goods Sold
	Direct Labor Efficiency Variance

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See Cornerstone 9.5.

What are the adjusted balances in Work in Process, Finished Goods, and Cost of Goods Sold after closing out all variances?

	Adjusted balance
Work in Process	$
Finished Goods	$
Cost of Goods Sold	$

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See Cornerstone

Answer 1

1.

Account Titles	Debit	Credit
Cost of goods sold	26550
Direct materials price variance		13850
Direct labor efficiency variance		12700
(Close variances with debit balance)
Direct materials usage variance	1110
Direct labor rate variance	830
Cost of goods sold		1940
(Close variances with credit balance)

Adjusted balance in cost of goods sold = $1550000 + $26550 - $1940 = $1574610

2.

	Account Titles	Debit	Credit
(a)	Direct materials usage variance	1110
	Direct labor rate variance	830
	Cost of goods sold		1940
(b)	Work in process	1551
	Finished goods	1243
	Cost of goods sold	9906
	Direct labor efficiency variance		12700
(c)	Work in process	1692
	Finished goods	1355
	Cost of goods sold	10803
	Direct materials price variance		13850

Working:

	Prime Cost	% of Total Prime Cost	Direct labor efficiency variance	Direct materials price variance
Cost of goods sold	1060000	77.999%	9906	10803
Work in process	166000	12.215%	1551	1692
Finished goods	133000	9.787%	1243	1355
Total	1359000	100.000%	12700	13850

	Adjusted Balance
Work in process	279243	(276000 + 1551 + 1692)
Finished goods	282598	(280000 + 1243 + 1355)
Cost of goods sold	1570709	(1550000 + 9906 + 10803)