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Chapter 23: Problem 21

The Assembly Department produced 2,000 units of product during June. Each unit required 1.5 standard direct labor hours. There were 3,200 actual hours used in the Assembly Department during June at an actual rate of \(14.00 per hour. The standard direct labor rate is \)15 per hour. Assuming direct labor for a month is paid on the fifth day of the following month, journalize the direct labor in the Assembly Department on June 30.

Short Answer

Expert verified
Debit Work in Process for $45,000; Credit Wages Payable for $44,800; Credit Labor Cost Variance for $200.

Step by step solution

01

Calculate Standard Labor Cost

First, calculate the standard labor cost based on the standard labor hours and rate.The total standard labor hours required = Number of units produced \( \times \) Standard labor hours per unit. \[ 2000 \text{ units} \times 1.5 \text{ hours/unit} = 3000 \text{ hours} \] Then calculate the cost using the standard labor rate:\[ 3000 \text{ hours} \times 15 \text{/hour} = 45000 \text{ dollars} \]
02

Calculate Actual Labor Cost

Now, calculate the actual labor cost using the given actual hours worked and the actual labor rate.\[ 3200 \text{ hours} \times 14 \text{/hour} = 44800 \text{ dollars} \]
03

Determine Labor Variance

Find the difference between the standard labor cost and the actual labor cost to determine the labor variance.\[ 45000 - 44800 = 200 \text{ dollars} \]"Since the actual cost is less than the standard cost, this is a favorable variance.
04

Journalize the Direct Labor Cost

Create the journal entry to record the actual labor costs.- Debit Work in Process (WIP) Inventory for the standard labor cost: \[ \text{Work in Process Inventory: } 45000 \text{ dollars} \]- Credit Wages Payable for the actual labor cost paid (since wages are paid next month): \[ \text{Wages Payable: } 44800 \text{ dollars} \]- Credit Labor Cost Variance for the favorable variance: \[ \text{Labor Cost Variance (Favorable): } 200 \text{ dollars} \]

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Standard Labor Cost
Standard labor cost is the expense that a business expects to incur for labor when producing a certain quantity of goods. It is based on predetermined factors such as the standard labor hours needed per unit and the standard hourly wage rate. In our example, the Assembly Department produced 2,000 units, with each unit requiring 1.5 hours of labor. This gives us a total of 3,000 labor hours. The standard rate per hour is set at $15. Therefore, the total standard labor cost for June is calculated to be $45,000. Understanding this cost helps businesses in budgeting and setting financial targets.
Actual Labor Cost
Actual labor cost refers to the real expenditure incurred by a company to pay for labor during a production period. This cost can vary from the standard cost due to differences in hours worked and hourly rates. In the exercise, 3,200 actual labor hours were logged at a rate of $14 per hour. The resulting actual labor cost was $44,800. Deviations from the standard labor cost are valuable indicators for management to identify areas of improvement or efficiency gains.
Journal Entry
Recording a journal entry for labor costs is an essential part of accounting. It ensures that labor expenses are accurately reflected in financial statements. Here's how the journal entry works for our scenario:
  • Debit the Work in Process (WIP) Inventory account for the standard labor cost of $45,000.
  • Credit the Wages Payable account for $44,800, as this amount will be paid out next month.
  • Credit the Labor Cost Variance account for $200, acknowledging the favorable variance.
This entry helps maintain clarity in financial records and ensures that all labor-related costs are properly accounted for.
Favorable Variance
A favorable variance occurs when the actual costs are less than the standard costs. It indicates efficiency or savings in the production process. In the provided example, the variance was calculated as $200. This was derived by subtracting the actual labor cost ($44,800) from the standard labor cost ($45,000). A favorable variance is generally a positive outcome, signaling that the actual labor performance was better than expected, either through reduced hours or lower hourly rates. It's crucial for businesses to analyze variances to understand operational performance and make data-driven decisions.

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Most popular questions from this chapter

Hickory Furniture Company manufactures unfinished oak furniture. Hickory use: standard cost system. The direct labor, direct materials, and factory overhead standar for an unfinished dining room table are as follows: \(\begin{array}{lll}\text { Direct labor: } & \text { standard rate } & \$ 18.00 \text { per hr. } \\ \text { standard time per unit } & 2.5 \mathrm{hrs} . \\ \text { Direct materials (oak): } & \text { standard price } & \$ 9.50 \text { per bd. ft. } \\ \text { Variable factory overhead: } & \text { standard quantity } & 18 \text { bd. ft. } \\ \text { Fixed factory overhead: } & \text { standard rate } & \$ 280 \text { per direct labor hr. } \\\ & \$ 1.20 \text { per direct labor hr. }\end{array}\) Determine the standard cost per dining room table.

St. Luke Hospital began using standards to evaluate its Admissions Department. The standard was broken into two types of admissions as follows: \begin{tabular}{lc} Type of Admission & Standard Time to Complete Admission Record \\ \cline { 2 - 3 } Unscheduled admission & 40 min. \\ Scheduled admission & \(10 \mathrm{~min} .\) \end{tabular} The unscheduled admission took longer, since name, address, and insurance information needed to be determined at the time of admission. Information was collected on scheduled admissions prior to the admissions, which was less time consuming. The Admissions Department employs two full-time people (40 productive hours per week, with no overtime) at \(\$ 18\) per hour. For the most recent week, the department handled 66 unscheduled and 240 scheduled admissions. a. How much was actually spent on labor for the week? b. What are the standard hours for the actual volume for the week? c. Calculate a time variance, and report how well the department performed for the week.

The following data were taken from the records of Parrott Company for December 2010: \(\begin{array}{lr}\text { Administrative expenses } & \$ 72,000 \\ \text { Cost of goods sold (at standard) } & 345,000 \\ \text { Direct materials price variance - favorable } & 900 \\ \text { Direct materials quantity variance-favorable } & 1,200 \\ \text { Direct labor rate variance- unfavorable } & 500 \\ \text { Direct labor time variance-favorable } & 450 \\\ \text { Variable factory overhead controllable variance-favorable } & 250 \\\ \text { Fixed factory overhead volume variance-unfavorable } & 3,200 \\\ \text { Interest expense } & 2,250 \\ \text { Sales } & 580,000 \\ \text { Selling expenses } & 85,800\end{array}\) Prepare an income statement for presentation to management.

The following data relate to the direct materials cost for the production of 2,000 automobile tires: Actual: 54,600 lbs. at \(1.80 \)98,280 Standard: 53,400 lbs. at \(1.85 \)98,790 a. Determine the price variance, quantity variance, and total direct materials cost variance. b. To whom should the variances be reported for analysis and control?

The following data relate to factory overhead cost for the production of 5,000 computers: \(\begin{array}{llr}\text { Actual: } & \text { Variable factory overhead } & \$ 125,000 \\ & \text { Fixed factory overhead } & 34,000 \\ \text { Standard: } & 5,000 \text { hrs. at } \$ 30 & 150,000\end{array}\) If productive capacity of \(100 \%\) was 8,000 hours and the factory overhead cost budgeted at the level of 5,000 standard hours was \(\$ 162,750\), determine the variable factory overhead controllable variance, fixed factory overhead volume variance, and total factory overhead cost variance. The fixed factory overhead rate was \(\$ 4.25\) per hour.
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