Isaman Corporation uses a standard cost system in which inventories are recorded at their standard costs and any variances are closed directly to Cost of Goods Sold.The direct labor standards for the company's only product specify 0.60 hours per unit at $21.50 per hour.During the year, the company started and completed 11,500 units.Direct labor employees worked 7,500 hours at an average cost of $19.50 per hour. During the year, the company started and completed 11,500 units.Direct labor employees worked 7,500 hours at an average cost of $19.50 per hour.
Assume that all transactions are recorded on a worksheet as shown in the text.On the left-hand side of the equals sign in the worksheet are columns for Cash, Raw Materials, Work in Process, Finished Goods, and PP&E (net) .All of the variance columns are on the right-hand-side of the equals sign along with the column for Retained Earnings.
When the direct labor cost is recorded, which of the following entries will be made?

A) ($12,900) in the Labor Rate Variance column
B) $12,900 in the Labor Efficiency Variance column
C) $12,900 in the Labor Rate Variance column
D) ($12,900) in the Labor Efficiency Variance column

Question

Shaily Patel · Accepted Answer

Final Answer : D, Explanation :  The total actual direct labor cost incurred is $146,250 (7,500 hours x $19.50 per hour).The total standard direct labor cost should be 11,500 units x 0.60 hours per unit x $21.50 per hour = $14,805.The labor rate variance is the difference between the actual direct labor rate ($19.50) and the standard direct labor rate ($21.50) multiplied by the actual number of direct labor hours worked (7,500 hours).(Labor Rate Variance) = ($21.50 - $19.50) x 7,500 hours = $15,000 - $6,750 = ($8,250).The labor efficiency variance is the difference between the actual direct labor hours worked (7,500 hours) and the standard direct labor hours allowed (11,500 units x 0.60 hours per unit) multiplied by the standard direct labor rate ($21.50).(Labor Efficiency Variance) = (11,500 x 0.60 x $21.50) - 7,500 x $21.50 = $15,525 - $16,125 = ($600).Therefore, the entry to record the direct labor cost for the year will be:Debit: Work in Process - $14,805Credit: Cash - $146,250Credit: Labor Efficiency Variance - ($600) Labor efficiency variance:SH = Actual output × Standard quantity = 11,500 units × 0.60 hours per unit = 6,900 hoursLabor efficiency variance = (AH - SH)× SR= (7,500 hours - 6,900 hours)× $21.50 per hour= (600 hours)× $21.50 per hour= $12,900 UFavorable variances are entered in the worksheet as positive entries and unfavorable variances as negative entries.

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