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14E

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Financial & Managerial Accounting
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Short Answer

Refer to Exercise 21-13. Hart Company records standard costs in its accounts and its materials variances in separate accounts when it assigns materials costs to the Work in Process Inventory account.

1. Show the journal entry that both charges the direct materials costs to the Work in Process Inventory account and records the materials variances in their proper accounts.

2. Assume that Hart’s materials variances are the only variances accumulated in the accounting period and that they are immaterial. Prepare the adjusting journal entry to close the variance accounts at period-end.

3. Identify the variance that should be investigated according to the management by exception concept. Explain.

The direct material price variance should be investigated by the managers.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Adjusting Entry

In accounting, adjusting entries are the journal entries passed at the end of an accounting period to adjust the revenues and expenses in the period they occurred. Also, the adjusting entries are recorded after preparing the trial balance.

Step 2: Preparation of journal entry

Date

Accounts and Explanation

Debit ($)

Credit ($)

Goods in process inventory

288,200

Direct material price variance

2,200

Direct material quantity variance

24,000

Raw material inventory

266,200

(To record the variances)

Step 3: Preparation of adjusting entry

Date

Accounts and Explanation

Debit ($)

Credit ($)

Material quantity variance

21,800

Cost of goods sold

21,800

(To close the variance account)

Step 4: Identification of variances

According to the data provided, the managers must investigate the direct material price variance because it is reflecting unfavorable outcomes for the business concern. Therefore, managers are required to review such variance as per the management by exception approach.

Most popular questions for Business-studies Textbooks

Phoenix Company’s 2017 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units.

PHOENIX COMPANY
Fixed Budget Report
For Year Ended December 31, 2017

Sales

$3,000,000

Cost of goods sold

Direct materials

$975,000

Direct labor

225,000

Machinery repairs (variable cost)

60,000

Depreciation-Plant equipment (straight-line)

300,000

Utilities ($45,000 is variable)

195,000

Plant management salaries

200,000

1,955,000

Gross profit

1,045,000

Selling expenses

Packaging

75,000

Shipping

105,000

Sales salary (fixed annual amount)

250,000

430,000

General and administrative expenses

Advertising expense

125,000

Salaries

241,000

Entertainment expense

90,000

456,000

Income from operations

$159,000

Required

1. Classify all items listed in the fixed budget as variable or fixed. Also determine their amounts per unit or their amounts for the year, as appropriate.

2. Prepare flexible budgets (see Exhibit 21.3) for the company at sales volumes of 14,000 and 16,000 units.

3. The company’s business conditions are improving. One possible result is a sales volume of 18,000 units. The company president is confident that this volume is within the relevant range of existing capacity. How much would operating income increase over the 2017 budgeted amount of $159,000 if this level is reached without increasing capacity?

4. An unfavorable change in business is remotely possible; in this case, production and sales volume for 2017 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level?

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