(Appendix 10A) Variance Analysis, Revision of Standards, Journal Entries The Lubbock plant of Morril’s Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:
During the year, the Lubbock plant had the following actual production activity:
a. Production of subassemblies totaled 50,000 units.
b. A total of 260,000 pounds of raw materials was purchased at $4.70 per pound.
c. There were 60,000 pounds of raw materials in beginning inventory (carried at $5 per lb.). There was no ending inventory.
d. The company used 82,000 direct labor hours at a total cost of $1,066,000.
The Lubbock plant’s practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.
1. Conceptual Connection: Complete the materials price and usage variances. Of the two materials variances, which is viewed as the most controllable? To whom would you assign responsibility for the usage variance in this case? Explain.
2. Conceptual Connection: Compute the labor rate and efficiency variances. Who is usually responsible for the labor efficiency variance? What are some possible causes for this variance?
3. Conceptual Connection: Assume that the purchasing agent for the small motors plant purchased a lower-quality raw material from a new supplier. Would you recommend that the plant continue to use this cheaper raw material? If so, what standards would likely need revision to reflect this decision? Assume that the end product’s quality is not significantly affected.
4. Prepare all possible journal entries.
ACCOUNTING FOR VARIANCES To illustrate recording variances, we will assume that the materials price variance is computed at the time materials are purchased. With this assumption, we can state a general rule for a firm’s inventory accounts: All inventories are carried at standard cost. As a result, actual costs are not entered into an inventory account. Instead, applied standard costs flow through inventory and eventually to cost of goods sold. As illustrated in this appendix, the accounts containing the variances between applied standard costs and actual costs are closed, which allows the amount of actual costs to ultimately impact the final cost of goods sold number that appears in the financial statements. In recording variances, unfavorable variances always are debits, and favorable variances always are credits. Entries for Direct Materials Variances Materials Price Variance The entry to record the purchase of materials follows (assuming an unfavorable MPV and that AQ is materials purchased):
For example, if AP is $0.0069 per ounce of corn, SP is $0.0060 per ounce, and 780,000 ounces of corn are purchased, the entry would be:
Notice that the raw materials are carried in the inventory account at standard cost. Materials Usage Variance The general form for the entry to record the issuance and usage of materials, assuming a favorable MUV, is as follows:
Here, AQ is the materials issued and used, not necessarily equal to the materials purchased. Notice that only standard quantities and standard prices are used to assign costs to Work in Process. No actual costs enter this account. For example, if AQ is 780,000 ounces of corn, SQ is 873,000 ounces, and SP is $0.006, then the entry would be:
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