In: Accounting
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.
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) |