Standard Costs Decomposition of Budget Variances Direct Mate

Standard Costs, Decomposition of Budget Variances, Direct Materials and Direct Labor 9-12 Pato Corporation produces leather sandals. The company uses a standard costing system and has set the following standards for direct materials and direct labor (for one pair of sandals) L02, LO3 Leather (3 strips$5) Direct labor (2 hrs. S6) S15 12 $27 Total prime cost During the year, Pato produced 4,000 pairs of sandals. The actual leather purchased was 12,400 strips at $4.98 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 8,400 hours at S6.25 per hour Required 1. Compute the costs of leather and direct labor that should have been incurred for the production of 4,000 pairs of sandals 2. Compute the total budget variances for direct materials and direct labor 3. Break down the total budget variance for direct materials into a price variance and a usage variance. Prepare the journal entries associated with these variances.

Solution

Solution 1:

Actual consumption of learther = 12400 strips

Cost incurred for leather = 12400*4.98 = $61,752

Actual labor hour = 8400 hours

Actual labor rate = $6.25 per hour

Cost incurred for labor = 8400*6.25 = $52,500

Solution 2:

Standard quanitity of direct material = 4000*3 = 12000 Strips

standard rate of material = $5 per Strip

Budgeted cost of direct material = SQ * SR = 12000*5 = $60,000

Direct material budget variance = Budgeted Cost - Actual cost = $60,000 - $61,752 = $1,752 U

Standard hours for direct labor = 2*4000 = 8000 hours

Standard rate of direct labor = 6 per hour

Budgeted cost of direct labor = SH * SR = 8000*6 = $48,000

Direct labor budget variance = Budgeted cost - Actual cost = $48,000 - $52,500 = $4,500 U

Solution 3:

Material price variance = (SR - AR) * AQ = (5 - 4.98) * 12400 = $248 F

Material usage variance = (SQ - AQ) * SR = (12000 - 12400) * 5 = $2000 U

Journal Entries
S. No.	Particulars	Debit	Credit
1	Material Price Variance:
	Raw Material A/c (12400 * 5) Dr	$62,000.00
	To Material Price Variance		$248.00
	To Accounts Payable (12400*4.98)		$61,752.00
	(Being purchase recorded at standard price and recorded favorable variance)
2	Material Usage Variance:
	WIP A/c (12000*5) Dr	$60,000.00
	Material Usage Variance A/c (400*5) Dr	$2,000.00
	To Raw Material A/c (12400*5)		$62,000.00
	(Being Raw material transfer to production at standard usage and record unfavorable variance)