Exercise-8 (Computation of actual hours worked by working backward)

Exenco Global is a large company that produces a lot of products. One of the product is a paint that is stored in containers. The variable standard cost per container is given below:

	Quantity / Hours	Per liter / Per hour	Standard cost
Direct materials	6 liters	$2	$12
Direct labor	1 hour	$9	$9
Variable manufacturing overhead	1 hour	$6	$6
			——–
			$24
			——–

The direct materials to produce this product is available in liquid form. During May, 60,000 liters of direct materials were purchased and 38,000 liters were sent to production department. The production for the month of May was 6,000 containers.

The following costs were incurred during May.

Actual cost of materials purchased	$114,000
Actual direct labor cost	$55,900
Actual variable manufacturing overhead cost	$40,950
Variable manufacturing overhead efficiency variance	$3,000	Unfavorable

Required:

1. Compute actual direct labor hours worked during the month of May.
2. Compute variable manufacturing overhead spending variance.
3. Prepare journal entries to record materials and labor related activities during May.

Solution:

(1) Actual direct labor hours worked during May:

Standard hours allowed at standard rate (6,000* hours × $6)	$36,000
Add unfavorable efficiency variance	$3,000
	——–
Actual hours worked at standard rate	$39,000
	——–
Actual hours worked = Actual hours worked at standard rate / Standard rate= $39,000 / $6= 6,500 hours

*6,000 containers × 1 hour

(2) Variable manufacturing overhead spending variance:

= (6,500 hours × $6.3) – (6,500 hours × $6)

= $40,950 – $39,000

= $1,950 Unfavorable

(3) Journal entries to record materials and labor related activities:

To record direct materials activities:
Direct materials	120,000
Direct materials price variance (See computations below)		6,000
Accounts payable		114,000
———————————-
Work in process	72,000
Direct materials quantity variance (See computations below)	4,000
Direct materials		76,000
To record direct labor activities:
Work in process	54,000
Direct labor efficiency variance (See computations below)	4,500
Direct labor rate variance (See computations below)		2,600
Wages payable		55,900

———————————-

= $114,000 – (60,000 liters × $2)

= $114,000 – $120,000

= $6,000 Favorable

= (38,000 liters × $2) – (36,000 liters × $2)

= $76,000 – $72,000

= $4,000 Unfavorable

$55,900 – (6,500 hours × $9)

= $55,900 – $58,500

= $2,600 Favorable

= (6,500 hours × $9) – (6,000 hours × $9)

= $58,500 – $54,000

= $4,500 Unfavorable