Question

Exercise 17-18 (Algo) Prorating Direct Labor Cost Variances (LO 17-1)

Cook Company processes and packages frozen seafood. The year just ended was Cook's first year of business and they are preparing financial statements. The immediate issue facing Cook is the treatment of the direct labor costs. Cook set a standard at the beginning of the year that allowed two hours of direct labor for each unit of output. The standard rate for direct labor is $44 per hour. During the year, Cook processed 63,400 units of seafood for the year, of which 5,072 units are in ending finished goods. (There are no work-in-process inventories). Cook used 132,000 hours of labor. Total direct labor costs paid by Cook for the year amounted to $5,127,500.

Required:

a. & b. What was the direct labor price variance and the direct labor efficiency variance for the year?

c. Assume Cook writes off all variances to Cost of Goods Sold. Prepare the entries Cook would make to record and close out the variances.

d. Assume Cook prorates all variances to the appropriate accounts. Prepare the entries Cook would make to record and close out the variances.

Complete this question by entering your answers in the tabs below.

• Req A and B
• Req C
• Req D

Assume Cook writes off all variances to Cost of Goods Sold. Prepare the entries Cook would make to record and close out the variances. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the purchase and use of 132,000 hours of direct labor at an actual cost of $5,127,500 and the transfer to work in process at a standard cost of $44 per hour.

Journal entry worksheet

• Record the purchase and use of 132,000 hours of direct labor at an actual cost of $5,127,500 and the transfer to work in process at a standard cost of $44 per hour.

Note: Enter debits before credits.

Event	General Journal	Debit	Credit
1

Answer 1

A. Director Labor Price Variance => (Standard Rate per hour- Actual Rate per hour)* Actual hours

ie. (44 - (5127,500/132000))*132,000 => 680,500 (F)

B. Direct Labor Efficiency Variance => (Standard time for actual output - actual hours)*standard rate per hour.

Ie. (63400*2 - 132,000)* 44 = 228,800 (U)

C. Journal Entry ($):

Direct Labor Price Variance Dr	680,500
To Direct Labor Efficiency Variance		228,800
To Cost of Goods Sold		451,700

D. Jounral Entry ($)

Direct Labor Price Variance Dr	680,500
To Direct Labor Efficiency Variance		228,800
To cost of goods sold (451700*58320/63400)		415,564
To Merchandise Inventory (451700*5072/63400)		36,136