Question

Problem #2: Standard Costing
	Ultra, Inc. manufactures and sells a full line of sunglasses. The company uses a standard cost system. Department
	managers' are held responsible for the explanation of the variances in their department performance reports.
	Recently, the variances in the Prestige line of sunglasses have been of concern. Data for the month of August is
	presented below. Assume beginning and ending inventory levels for WiP and FG are zero.
					Static Budget	Actual
	revenues				$600,000	$625,000
	DM				$150,000	$163,400
	DL				$135,000	$138,700
	FOH (cost driver = DL hours)				$114,000	$121,000
	gross profit				$201,000	$201,900
	selling price per Prestige sunglass				$76.92	$76.22
	DM (total # ounces)				15,600	16,100
	DL rate ($ per DL hour)				$18.00	$19.55
(1)	Prepare the journal entry for the purchase of DM. Assume DM ourchases = DM used. (2 points)
	DM inventory
	DM spending variance
	accounts payable
(2)	Prepare the journal entry for the release of DM into production. (2 points)
	WiP inventory
	DM efficiency variance
	DM inventory
(3)	Prepare the journal entries for DL. (4 points)
	DL expense
	wages payable
	WiP inventory
	DL efficiency variance
	DL spending variance
	DL expense
(4)	Prepare the journal entries for FOH. (4 points)
	FOH expenses
	accounts payable
	mfg FOH control
	FOH expenses
	WiP inventory
	mfg FOH control
	mfg FOH control
	FOH volume variance
	FOH spending variance
(5)	Prepare the adjusting entries to close out the variance accounts. (4 points)
	DM spending variance
	CGS
	DM efficiency variance
	CGS
	DL spending variance
	CGS
	DL efficiency variances
	CGS
	FOH volume variance
	CGS
	FOH spending variance
	CGS
(6)	Complete the CGS T-Account below. (4 points)
			CGS
	DM @ std
	DL @ std
	FOH @ std
	Adjustments to CGS
	Adjusted CGS

Answer 1

1. Journal entry for the purchase of Direct material
Direct material Inventory	$154,807
Direct material spending variance	$8,593
Accounts payable		$163,400
Direct material spending variance = (Actual price - standard price) x Actual quantity
= ($10.1490 - $9.6153) x 16100 = $8593
2. Journal entry for the release of DM into production
WIP inventory	$150,000
DM efficiency variance	$4,807
DM inventory		$154,807
DM efficiency variance = (Actual quantity - Standard quantity) x standard rate
= (16100 - 15600) x 9.6153
= $4807
3. Journal entries for DL
DL expenses	$138,700
Wages payable		$138,700
WIP Inventory	$135,000
DL efficiency variance		$7,925
DL spending variance	$11,625
DL expenses		$138,700
DL efficiency variance = (Actual hour - standard hour)x Standard rate
= (7094.6291 - 7500) x $19.55
= $7925 Favourable
DL spending variance = (Actual rate - standard rate) x standard hour
= ($19.55 - $18) x 7500
= $11625
4. Journal entry for FOH
FOH expenses	$121,000
Accounts payable		$121,000
Mfg FOH control	$7,000
FOH expenses		$7,000
Mfg FOH control = Actual overhead - Standard overhead
= 121000 - 114000
= $7000
WIP inventory	$114,000
Mfg FOH control		$114,000
Mfg FOH Control		$7,000
FOH volume variance		$6,500
FOH spending variance	$13,500
FOH volume variance = (Standard hour allowed x overhead rate) - overhead charged to production
= (7500 x 17) - 121000
= $6500
FOH spending variance = Standard hour worked (Actual overhead rate - standard overhead rate)
= 7500 ($17 - $15.20)
= $13500
5. Adjusting entries to close out the variance account
DM spending variance		$8,953
CGS	$8,953
DM efficiency variance		$4,807
CGS	$4,807
DL spending variance		$11,625
CGS	$11,625
DL efficiency variance	$7,925
CGS		$7,925
FOH volume variance	$6,500
CGS		$6,500
FOH spending variance		$13,500
CGS	$13,500
6. CGS T-account
DM @ std	$150,000
DL @ std	$135,000
FOH @ std	$114,000
Adjustments to CGS	$24,460
Adjusted CGS	$423,460