Introduction to Managerial

Accounting Canadian 5th Edition

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Appendix 11A
General Ledger Entries to Record Variances
Brief Exercise 11A-1 (10 minutes)
1. Materials inventory Dr $39,000 (12,000 m x $3.25 per m)
Materials price variance Dr $2,400
Accounts payable Cr 41,400

2. Work in process, direct materials Dr $32,500 (10,000 m x $3.25 per m)

Materials quantity variance Dr $1,625
Materials inventory Cr $34,125 (10,500 m x $3.25 per m)

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Solutions Manual, Appendix 11A 1
3. Work in process, direct labour Dr $25,000 (2,000 hrs x $12.50)
Labour efficiency variance Cr $250
Wages payable Cr $24,156 (1,980 hrs x $12.20)
Labour rate variance Cr $594

Exercise 11A-1 (60 minutes)

1. a.
Actual Quantity Actual Quantity Standard Quantity
of Inputs, at of Inputs, at Allowed for Output,
Actual Price Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
30,000 feet 30,000 feet 21,000 feet*
× $4.60 per foot × $5.00 per foot × $5.00 per foot
= $138,000 = $150,000 = $105,000
  
Price Variance,
$12,000 F
24,000 feet × $5.00 per foot
= $120,000

Quantity Variance, $15,000
U
*3,000 units × 7 feet per unit = 21,000 feet

Alternatively:
Materials price variance = AQ (AP – SP)
30,000 feet ($4.60 per foot – $5.00 per foot) = $12,000 F
Materials quantity variance = SP (AQ – SQ)
$5.00 per foot (24,000 feet – 21,000 feet) = $15,000 U

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Solutions Manual, Appendix 11A 2
Exercise 11A-1 (continued)

b. The journal entries would be:

Raw Materials
(30,000 feet × 5.00 per foot) .................................. 150,000
Materials Price Variance
(30,000 feet × $0.40 per foot F) ....................... 12,000
Accounts Payable
(30,000 feet × $4.60 per foot) .......................... 138,000
Work in Process
(21,000 feet × $5.00 per foot) ................................ 105,000
Materials Quantity Variance
(3,000 feet U × $5.00 per foot)
.......................................................................... 15,000
Raw Materials
(24,000 feet × $5.00 per foot) .......................... 120,000

2. a.
Actual Hours of Actual Hours of Standard Hours Allowed
Input, at the Actual Input, at the Standard for Output, at the
Rate Rate Standard Rate
(AH × AR) (AH × SR) (SH × SR)
$43,000 5,000 hours 4,800 hours*
× $8.00 per hour × $8.00 per hour
= $40,000 = $38,400
  
Rate Variance, Efficiency Variance,
$3,000 U $1,600 U

Total Variance, $4,600 U

*3,000 units × 1.6 hours per unit = 4,800 hours.

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Solutions Manual, Appendix 11A 3
Exercise 11A-1 (continued)

Alternate Solution:
Labour rate variance = AH (AR – SR)
5,000 hours ($8.60 per hour* – $8.00 per hour) = $3,000 U
*$43,000 ÷ 5,000 hours = $8.60 per hour.
Labour efficiency variance = SR (AH – SH)
$8.00 per hour (5,000 hours – 4,800 hours) = $1,600 U

b. The journal entry would be:

Work in Process
(4,800 hours × $8.00 per hour) ................................ 38,400
Labour Rate Variance
(5,000 hours × $0.60 per hour U) ............................. 3,000
Labour Efficiency Variance
(200 hours U × $8.00 per hour) ................................ 1,600
Wages Payable
(5,000 hours × $8.60 per hour) .......................... 43,000

3. The entries are: entry (a), purchase of materials; entry (b), issue of materials to
production; and entry (c), incurrence of direct labour cost.

Raw Materials Work in Process

(a) 150,000 120,000 (b) (b) 105,000
Bal.* 30,000 (c) 38,400

Accounts Payable Wages Payable

138,000 (a) 43,000 (c)

Materials Price Variance Materials Quantity Variance

12,000 (a) (b) 15,000

Labour Rate Variance Labour Efficiency Variance

(c) 3,000 (c) 1,600

*6,000 feet of material at a standard cost of $5.00 per foot.

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Solutions Manual, Appendix 11A 4
Exercise 11A-2 (30 minutes) (LO3 – CC15, 17; LO6 – CC27A, 28A)

1. The general ledger entry to record the purchase of materials for the month is:
Raw Materials
(15,000 meters at $5.40 per meter) .............................. 81,000
Materials Price Variance
(15,000 meters at $0.20 per meter U) ........................... 3,000
Accounts Payable
(15,000 meters at $5.60 per meter) ........................ 84,000

2. The general ledger entry to record the use of materials for the month is:
Work in Process
(12,000 meters at $5.40 per meter) .............................. 64,800
Materials Quantity Variance
(100 meters at $5.40 per meter F) .......................... 540
Raw Materials
(11,900 meters at $5.40 per meter) ........................ 64,260

3. The general ledger entry to record the incurrence of direct labor cost for the month
is:
Work in Process (2,000 hours at $14.00 per hour) ............. 28,000
Labor Rate Variance
(1,950 hours at $0.20 per hour U) ................................. 390
Labor Efficiency Variance
(50 hours at $14.00 per hour F) .............................. 700
Wages Payable
(1,950 hours at $14.20 per hour) ............................ 27,690

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Solutions Manual, Appendix 11A 5
Exercise 11A-3 (20 minutes)

1. The general ledger entry to record the purchase of materials for the month is:
Raw Materials
(12,000 metres at $3.25 per metre) ............................. 39,000
Materials Price Variance
(12,000 metres at $0.20 per metre U) .......................... 2,400
Accounts Payable
(12,000 metres at $3.45 per metre) ....................... 41,400

2. The general ledger entry to record the use of materials for the month is:
Work in Process
(10,000 metres at $3.25 per metre) ............................. 32,500
Materials Quantity Variance
(500 metres at $3.25 per metre U) ............................... 1,625
Raw Materials
(10,500 metres at $3.25 per metre) ....................... 34,125

3. The general ledger entry to record the incurrence of direct labour cost for the month
is:
Work in Process (2,000 hours* at $12.50 per hour) .......... 25,000
Labour Rate Variance
(1,980 hours at $0.30 per hour F) .......................... 594
Labour Efficiency Variance
(20 hours at $12.50 per hour F) ............................. 250
Wages Payable
(1,980 hours at $12.20 per hour) ........................... 24,156
*5,000 units × 0.4 hours per unit = 2,000 hours.

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Solutions Manual, Appendix 11A 6
EXERCISE 11A-4 (50 minutes) (LO4-CC22, 23; LO6—CC27A, 28A)

This exercise requires students to know the distinction between a standard cost system
and normal cost system. And that the overhead application rate is the same for normal
costing and standard costing systems since the predetermined rate is the quotient of
budgeted overhead cost and the denominator volume of the cost driver.

Using the information provided in the question the following can be assembled:

Budgeted Cost:
$180,000
Allocation rate as per normal costing system:
$210,000/35,000 = $6 per hour
Denominator volume:
$180,000/$6 = 30,000 hours
Standard labour hours per unit
30,000 hours/20,000 units = 1.5 hours per unit
Actual volume:
35,000 hours or 35,000 x 0.6286 units per hour
= 22,000 units of product
Standard hours allowed for 22,000 units of output:
22,000 units x 1.5 hours = 33,000 hours

Fixed overhead variances:

Budgeted Fixed Fixed Overhead Applied
Actual Fixed Overhead Overhead to Work in Process
33,000 DLHs ×
$6 per DLH
$181,000 $180,000 = $198,000

Budget variance Volume variance

= $1,000 U = $18,000 F

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Solutions Manual, Appendix 11A 7
EXERCISE 11A-4 (continued)

Alternative solution:
Fixed Portion of
Volume = the Predetermined Denominator - Standard Hours
Variance Overhead Rate Hours ( Allowed )
= $6 per DLH (30,000 DLHs – 33,000 DLHs )

= $18,000 F
Budget = Actual Fixed - Flexible Budget Fixed
Variance Overhead Cost Overhead Cost

= $181,000 – $180,000

= $1,000 U

Journal Entries:
These can be prepared by following the entries in Exhibit 11A-5.
Fixed overhead cost control Dr $181,000
Fixed overhead costs payable Cr $181,000
(To record the incidence of fixed overhead costs)
Work in process Dr $198,000
Fixed overhead cost control Cr $198,000
(To record the application of overhead to production)
Budget variance ($181,000 - $180,000) Dr $1,000
Volume variance Cr 18,000
Fixed overhead cost control Dr $17,000
(to record the variances and close out the fixed overhead control account)

NOTE: At this point the variance accounts will have a non-zero balances. And the
overhead control account should be closed. At the period end the variance accounts will
be closed with corresponding entries to cost of goods sold.

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Solutions Manual, Appendix 11A 8
Problem 11A-1 ( 75 minutes) (LO3 – CC15, 16, 17; LO6 – CC27A, 28A)
1. a.
Actual Quantity Actual Quantity Standard Quantity Allowed
of Input, of Input, for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
60,000 feet × 60,000 feet × 36,000 feet* ×
$0.95 per foot $1.00 per foot $1.00 per foot
= $57,000 = $60,000 = $36,000

Materials price variance

= $3,000 F

38,000 feet ×
$1.00 per foot
= $38,000

Materials quantity variance

= $2,000 U

*6,000 units × 6.0 feet per unit = 36,000 feet

Alternatively, the variances can be computed using the formulas:

Materials quantity variance = SP (AQ – SQ)
= $1.00 per foot (38,000 feet – 36,000 feet)
= $2,000 U
Materials price variance = AQ (AP – SP)
= 60,000 feet ($0.95 per foot – $1.00 per foot)
= $3,000 F

b. Raw Materials (60,000 feet @ $1.00 per foot) ................... 60,000

Materials Price Variance
(60,000 feet @ $0.05 per foot F) ............................. 3,000
Accounts Payable
(60,000 feet @ $0.95 per foot) ................................ 57,000
Work in Process (36,000 feet @ $1.00 per foot)................. 36,000
Materials Quantity Variance
(2,000 feet U @ $1.00 per foot)..................................... 2,000
Raw Materials (38,000 feet @ $1.00 per foot) ............. 38,000

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Solutions Manual, Appendix 11A 9
Problem 11A-1 (continued)

2. a.
Standard Hours Allowed
Actual Hours of Input, Actual Hours of Input, for Actual Output,
at Actual Rate at Standard Rate at Standard Rate
(AH × AR) (AH × SR) (SH × SR)
6,500 hours* × 6,000 hours** ×
$4.50 per hour $4.50 per hour
$27,950 = $29,250 = $27,000

Labor rate variance Labor efficiency variance

= $1,300 F = $2,250 U
Flexible budget variance = $950 U

*The actual hours worked during the period can be computed through the
variable overhead efficiency variance, as follows:
SR (AH – SH) = Efficiency variance
$3 per hour (AH – 6,000 hours**) = $1,500 U
$3 per hour × AH – $18,000 = $1,500***
$3 per hour × AH = $19,500
AH = 6,500 hours
**6,000 units × 1.0 hour per unit = 6,000 hours
***When used with the formula, unfavorable variances are positive and
favorable variances are negative.

Alternatively, the variances can be computed using the formulas:

Labor efficiency variance = SR (AH – SH)
= $4.50 per hour (6,500 hours – 6,000 hours)
= $2,250 U
Labor rate variance = AH × (AR – SR)
= 6,500 hours ($4.30 per hour* – $4.50 per hour)
= $1,300 F
*$27,950 ÷ 6,500 hours = $4.30 per hour

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Solutions Manual, Appendix 11A 10
Problem 11A-1 (continued)

b. Work in Process
(6,000 hours @ $4.50 per hour) ............................... 27,000
Labor Efficiency Variance
(500 hours U @ $4.50 per hour) ............................... 2,250
Labor Rate Variance
(6,500 hours @ $0.20 per hour F) ...................... 1,300
Wages Payable
(6,500 hours @ $4.30 per hour) ......................... 27,950

3. a.
Standard Hours Allowed
Actual Hours of Input, Actual Hours of Input, for Actual Output,
at Actual Rate at Standard Rate at Standard Rate
(AH × AR) (AH × SR) (SH × SR)
6,500 hours × 6,000 hours ×
$3.00 per hour $3.00 per hour
$20,475 = $19,500 = $18,000

Variable overhead rate Variable overhead

variance efficiency variance
= $975 U = $1,500 U

Spending (Flexible budget) variance = $2,475 U

Alternatively, the variances can be computed using the formulas:

Variable overhead efficiency variance = SR (AH – SH)
= $3.00 per hour (6,500 hours – 6,000 hours)
= $1,500 U
Variable overhead rate variance = AH × (AR – SR)
= 6,500 hours ($3.15 per hour* – $3.00 per hour)
= $975 U
*$20,475 ÷ 6,500 hours = $3.15 per hour

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Solutions Manual, Appendix 11A 11
Problem 11A-1 (continued)

b. No. When variable manufacturing overhead is applied on the basis of direct labor-
hours, it is impossible to have an unfavorable variable manufacturing overhead
efficiency variance when the direct labor efficiency variance is favorable. The
variable manufacturing overhead efficiency variance is the same as the direct
labor efficiency variance except that the difference between actual hours and the
standard hours allowed for the output is multiplied by a different rate. If the
direct labor efficiency variance is favorable, the variable manufacturing overhead
efficiency variance must also be favorable.

4. For materials:
Favorable price variance: Decrease in outside purchase prices, fortunate buy, inferior
quality materials, unusual discounts due to quantity purchased, inaccurate
standards.
Unfavorable quantity variance: Inferior quality materials, carelessness, poorly
adjusted machines, unskilled workers, inaccurate standards, machine
breakdown/repair time.

For labor:
Favorable rate variance: Unskilled workers (paid lower rates), piecework, inaccurate
standards.
Unfavorable efficiency variance: Poorly trained workers, poor quality materials, faulty
equipment, work interruptions, fixed labor with insufficient demand to keep them
all busy, inaccurate standards.

For variable overhead:

Unfavorable rate variance: Increase in supplier prices, inaccurate standards, waste,
theft of supplies.
Unfavorable efficiency variance: See comments under direct labor efficiency
variance.

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Solutions Manual, Appendix 11A 12
Problem 11A-2 (60 minutes) (LO3 – CC15, 16, 17; LO6 – CC27A, 28A)

1. a.
Standard Quantity Allowed
Actual Quantity of Input, Actual Quantity of Input, for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
21,120 yards × 21,120 yards × 19,200 yards* ×
$3.35 per yard $3.60 per yard $3.60 per yard
= $70,752 = $76,032 = $69,120

Materials price variance = Materials quantity

$5,280 F variance = $6,912 U
Felixable budget variance = $1,632 U
*4,800 units × 4.0 yards per unit = 19,200 yards

Alternatively, the variances can be computed using the formulas:

Materials quantity variance = SP (AQ – SQ)
= $3.60 per yard (21,120 yards – 19,200 yards)
= $6,912 U
Materials price variance = AQ (AP – SP)
= 21,120 yards ($3.35 per yard – $3.60 per yard)
= $5,280 F

b. Raw Materials (21,120 yards @ $3.60 per yard) .................... 76,032

Materials Price Variance
(21,120 yards @ $0.25 per yard F) ............................. 5,280
Accounts Payable
(21,120 yards @ $3.35 per yard) ................................ 70,752

Work in Process (19,200 yards @ $3.60 per yard) ................. 69,120

Materials Quantity Variance
(1,920 yards U @ $3.60 per yard) ..................................... 6,912
Raw Materials (21,120 yards @ $3.60 per yard) .............. 76,032

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Solutions Manual, Appendix 11A 13
Problem 11A-2 (continued)

2. a.
Standard Hours Allowed
Actual Hours of Input, Actual Hours of Input, for Actual Output,
at Actual Rate at Standard Rate at Standard Rate
(AH × AR) (AH × SR) (SH × SR)
6,720 hours* × 6,720 hours × 7,680 hours** ×
$4.85 per hour $4.50 per hour $4.50 per hour
= $32,592 = $30,240 = $34,560

Labor rate variance Labor efficiency variance

= $2,352 U = $4,320 F
Flexible budget variance = $1,968 F
*4,800 units × 1.4 hours per unit = 6,720 hours
**4,800 units × 1.6 hours per unit = 7,680 hours

Alternatively, the variances can be computed using the formulas:

Labor efficiency variance = SR (AH – SH)
= $4.50 per hour (6,720 hours – 7,680 hours)
= $4,320 F
Labor rate variance = AH (AR – SR)
= 6,720 hours ($4.85 per hour – $4.50 per hour)
= $2,352 U

b. Work in Process (7,680 hours @ $4.50 per hour) .................. 34,560

Labor Rate Variance
(6,720 hours @ $0.35 per hour U) .................................... 2,352
Labor Efficiency Variance
(960 hours F @ $4.50 per hour) ................................. 4,320
Wages Payable (6,720 hours @ $4.85 per hour) ............. 32,592

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Solutions Manual, Appendix 11A 14
Problem 11A-2 (continued)

3.
Standard Hours Allowed
Actual Hours of Input, Actual Hours of Input, for Actual Output,
at Actual Rate at Standard Rate at Standard Rate
(AH × AR) (AH × SR) (SH × SR)
6,720 hours × 6,720 hours × 7,680 hours ×
$2.15 per hour $1.80 per hour $1.80 per hour
= $14,448 = $12,096 = $13,824

Variable overhead rate Variable overhead

variance efficiency variance
= $2,352 U = $1,728 F
Flexible budget variance = $624 U

Alternatively, the variances can be computed using the formulas:

Variable overhead efficiency variance = SR (AH – SH)
= $1.80 per hour (6,720 hours – 7,680 hours)
= $1,728 F
Variable overhead rate variance = AH (AR – SR)
= 6,720 hours ($2.15 per hour – $1.80 per hour)
= $2,352 U

4. No. This total variance is made up of several quite large individual variances, some
of which may warrant investigation. A summary of variances is given below:
Materials:
Quantity variance...................................... $6,912 U
Price variance ........................................... 5,280 F $1,632 U
Labor:
Efficiency variance .................................... 4,320 F
Rate variance ........................................... 2,352 U 1,968 F
Variable overhead:
Efficiency variance .................................... 1,728 F
Spending variance .................................... 2,352 U 624 U
Net unfavorable variance .............................. $ 288 U

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Solutions Manual, Appendix 11A 15
Problem 11A-2 (continued)

5. The variances have many possible causes. Some of the more likely causes include:

Materials variances:
Favorable price variance: Good price, inaccurate standards, inferior quality materials,
unusual discount due to quantity purchased, drop in market price.
Unfavorable quantity variance: Carelessness, poorly adjusted machines, unskilled
workers, inferior quality materials, inaccurate standards.

Labor variances:
Unfavorable rate variance: Use of highly skilled workers, change in wage rates,
inaccurate standards, overtime.
Favorable efficiency variance: Use of highly skilled workers, high-quality materials,
new equipment, inaccurate standards.

Variable overhead variances:

Unfavorable rate variance: Increase in costs, inaccurate standards, waste, theft,
spillage, purchases in uneconomical lots.
Favorable efficiency variance: Same as for labor efficiency variance.

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Solutions Manual, Appendix 11A 16