Allan Company manufactures overalls. During the year, it manufactured 125,000 overalls, using 2.9 hours of direct labour at a rate of $6.25 per hour. The materials and labour standards for manufacturing the overalls are as follows:
Allan required 600,000 m at $1.95 per metre to make the 125,000 overalls.
$\begin{array}{lll}
\text {Direct materials ( $ 5 \mathrm{~m} $ of denim $ (012 $ per metre) }&\$10\
\text { Direct labour (3 hours $ @ \$ 6 $ per hour)}&18\\end{array}$

-Refer to the Figure.What is the entry to record the direct labour variances?
A)Work in Process 2,265,625Labour Efficiency Variance 75,000Labour Rate Variance 90,625Accrued Payroll 2,250,000
B)Work in Process 2,250,000Labour Rate Variance 90,625Labour Efficiency Variance 75,000Accrued Payroll 2,265,625
C)Work in Process 2,250,000Labour Rate Variance 93,750Labour Efficiency Variance 78,125Accrued Payroll 2,265,625
D)Work in Process 2,265,625Labour Efficiency Variance 78,125Labour Rate Variance 93,750Accrued Payroll 2,250,000

Question

Allan Company manufactures overalls. During the year, it manufactured 125,000 overalls, using 2.9 hours of direct labour at a rate of $6.25 per hour. The materials and labour standards for manufacturing the overalls are as follows:
Allan required 600,000 m at $1.95 per metre to make the 125,000 overalls.
 $\begin{array}{lll}
\text {Direct materials ( $ 5 \mathrm{~m} $ of denim $ (012 $ per metre) }&\$10\
\text { Direct labour (3 hours $ @ \$ 6 $ per hour)}&18\\end{array}$

-Refer to the Figure.What is the entry to record the direct labour variances?
A)Work in Process 2,265,625Labour Efficiency Variance 75,000Labour Rate Variance 90,625Accrued Payroll 2,250,000
B)Work in Process 2,250,000Labour Rate Variance 90,625Labour Efficiency Variance 75,000Accrued Payroll 2,265,625
C)Work in Process 2,250,000Labour Rate Variance 93,750Labour Efficiency Variance 78,125Accrued Payroll 2,265,625
D)Work in Process 2,265,625Labour Efficiency Variance 78,125Labour Rate Variance 93,750Accrued Payroll 2,250,000

Quizplus · Accepted Answer

To calculate the direct labour variances, we first determine the standard cost of the labour for the actual production and compare it to the actual cost. The standard cost for direct labour is calculated based on the standards given: 3 hours at $6 per hour for each of the 125,000 overalls manufactured. This gives us a total standard cost of $125,000 \text{ overalls} \times 3 \text{ hours/overall} \times \$6/\text{hour} = \$2,250,000$.The actual cost of labour is given as 2.9 hours at $6.25 per hour for each overall, totaling $125,000 \text{ overalls} \times 2.9 \text{ hours/overall} \times \$6.25/\text{hour} = \$2,265,625$.The Labour Efficiency Variance (LEV) is calculated as the difference between the standard hours allowed for actual production and the actual hours worked, multiplied by the standard rate. In this case, the standard hours allowed are $125,000 \times 3 = 375,000$ hours, and the actual hours worked are $125,000 \times 2.9 = 362,500$ hours. The difference is $375,000 - 362,500 = 12,500$ hours, which at the standard rate of $6/hour gives a LEV of $12,500 \times \$6 = \$75,000$.The Labour Rate Variance (LRV) is the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual hours worked. The actual hourly rate is $6.25, and the standard rate is $6. The difference is $0.25, which over the actual hours worked (362,500 hours) gives an LRV of $362,500 \times \$0.25 = \$90,625$.Therefore, the correct entry to record the direct labour variances, which credits the Accrued Payroll for the actual cost and debits Work in Process for the standard cost, while also accounting for the variances, is option B.

Allan Company Manufactures Overalls -Refer to the Figure