Question

Direct Materials, Direct Labor, and Overhead Variances, Journal Entries

Algers Company produces dry fertilizer. At the beginning of the year, Algers had the following standard cost sheet:

Direct materials (5 lbs. @ $2.60)	$13.00
Direct labor (0.75 hr. @ $18.00)	13.50
Fixed overhead (0.75 hr. @ $4.00)	3.00
Variable overhead (0.75 hr. @ $3.00)	2.25
Standard cost per unit	$31.75

Algers computes its overhead rates using practical volume, which is 54,000 units. The actual results for the year are as follows:

Units produced: 53,000

Direct materials purchased: 274,000 pounds at $2.50 per pound

Direct materials used: 270,400 pounds

Direct labor: 40,100 hours at $17.95 per hour

Fixed overhead: $161,800

Variable overhead: $122,000

Required:

1. Compute price and usage variances for direct materials.

MPV	$	Favorable
MUV	$	Unfavorable

2. Compute the direct labor rate and labor efficiency variances.

Labor Rate Variance	$	Favorable
Labor Efficiency Variance	$	Unfavorable

3. Compute the fixed overhead spending and volume variances.

Spending Variance	$	Favorable
Volume Variance	$	Unfavorable

4. Compute the variable overhead spending and efficiency variances.

Spending Variance	$	Unfavorable
Efficiency Variance	$	Unfavorable

Answer 1

1

AQ	=	Actual quantity
SQ	=	Standard quantity
AR	=	Actual rate
SR	=	Standard rate
Actual cost
AQ	x	AR		AQ	x	SR		SQ	x	SR
274,000	x	2.50		274,000	x	2.6		265,000	x	2.6
(1)	=	685,000		(2)	=	712,400		(3)	=	689,000
Direct material price variance				(2)	-	(1)	=	27,400		Favourable
Direct material usage variance				(3)	-	(2)	=	-23,400		Unfavourable

2

AH	=	Actual hours
SH	=	Standard hours
AR	=	Actual rate
SR	=	Standard rate
Actual cost
AH	x	AR		AH	x	SR		SH	x	SR
40,100	x	17.95		40,100	x	18		39,750	x	18
(1)	=	719,795		(2)	=	721,800		(3)	=	715,500
Direct labor rate variance				(2)	-	(1)	=	2,005		Favourable
Direct labor efficiency variance				(3)	-	(2)	=	-6,300		Unfavourable

4

AH	=	Actual hours
SH	=	Standard hours
AR	=	Actual rate
SR	=	Standard rate
Actual cost
AH	x	AR		AH	x	SR		SH	x	SR
40,100	x	3.0424		29,400	x	3		39,750	x	3
(1)	=	122,000		(2)	=	88,200		(3)	=	119,250
VOH spending variance				(2)	-	(1)	=	-33,800		Unfavourable
VOH efficiency variance				(3)	-	(2)	=	31,050		Favourable

3

AH	=	Actual hours
SH	=	Standard hours for bugeted production
BH	=	Flexible budget hours
AR	=	Actual rate
SR	=	Standard rate
Actual cost
AH	x	AR		BH	x	SR		SH	x	SR
40,100	x	4.0349		39,750	x	3		40,500	x	3
(1)	=	161,800		(2)	=	119,250		(3)	=	121,500
FOH spending variance				(2)	-	(1)	=	-42,550		Unfavourable
FOH volume variance				(3)	-	(2)	=	2,250		Favourable