Question

In: Accounting

Cook Company processes and packages frozen seafood. The year just ended was Cook's first year of...

Cook Company processes and packages frozen seafood. The year just ended was Cook's first year of business and they are preparing financial statements. The immediate issue facing Cook is the treatment of the direct labor costs. Cook set a standard at the beginning of the year that allowed two hours of direct labor for each unit of output. The standard rate for direct labor is $27 per hour. During the year, Cook processed 60,000 units of seafood for the year, of which 4,800 units are in ending finished goods. (There are no work-in-process inventories). Cook used 123,500 hours of labor. Total direct labor costs paid by Cook for the year amounted to $3,087,500.

Required:
a. & b. What was the direct labor price variance and the direct labor efficiency variance for the year?
c. Assume Cook writes off all variances to Cost of Goods Sold. Prepare the entries Cook would make to record and close out the variances.
d. Assume Cook prorates all variances to the appropriate accounts. Prepare the entries Cook would make to record and close out the variances.

Solutions

Expert Solution

Solution a&b:

Direct Labor Cost Variance
Actual Cost Standard cost for actual quantity Standard Cost
AH * AR = AH * SR = SH * SR =
123500 $25.00 $3,087,500.00 123500 $27.00 $3,334,500.00 120000 $27.00 $3,240,000.00
$247,000.00 Favorable $94,500.00 Unfavorable
Direct Labor rate Variance Direct Labor Efficiency Variance
Direct Labor Rate variance $247,000.00 Favorable
Direct Labor Efficiency variance $94,500.00 Unfavorable
Total direct labor variance $152,500.00 Favorable

Solution c:

Journal Entries - Cook Company
Event Particulars Debit Credit
1 Direct labor rate variance Dr $247,000.00
       To Direct labor efficiency variance $94,500.00
       To Cost of goods sold $152,500.00
(To close Labor variance to cost of goods sold)

Solution d:

Journal Entries - Cook Company
Event Particulars Debit Credit
1 Direct labor rate variance Dr $247,000.00
       To Direct labor efficiency variance $94,500.00
       To Cost of goods sold ($152,500*55200/60000) $140,300.00
       To Finished goods inventory ($152,500*4800/60000) $12,200.00
(To close Labor variance to cost of goods sold)

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