PROBLEM 24.2A
AgriChem Industries manufactures fertilizer concentrate and uses cost standards. The fertilizer
is produced in 500-pound batches; the normal level of production is 250 batches of fertilizer per
month. The standard costs per batch are as follows:
Direct materials:
Standard
Costs per
Batch
Various chemicals (500 pounds per batch at $0.60/pound) . . . . . . . . . . $300
Direct labor:
Preparation and blending (25 hours per batch at $7.00/hour) . . . . . . . . . 175
Manufacturing overhead:
Fixed ($50,000 per month 4 250 batches) . . . . . . . . . . . . . . . . . . . . . . . $200
Variable (per batch) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 225
Total standard cost per batch of fertilizer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700
During January, the company temporarily reduced the level of production to 200 batches of
fertilizer. Actual costs incurred in January were as follows:
Instructions
You have been engaged to explain in detail the elements of the $5,250 net unfavorable cost variance
and to record the manufacturing costs for January in the company’s standard cost accounting
system.
a. As a first step, compute the materials price and quantity variances, the labor rate and efficiency
variances, and the overhead spending and volume variances for the month.
b. Prepare journal entries to record the flow of manufacturing costs through the standard cost
system and the related cost variances. Make separate entries to record the costs of direct materials
used, direct labor, and manufacturing overhead. Work in Process Inventory is to be debited
only with standard costs.
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