Question

Bialas Corporation uses a standard cost system in which Inventories are recorded at their standard costs and any varlances are closed directly to Cost of Goods Sold. The standards for direct materials for the company's only product specify 1.6 liters per unit at $7.00 per liter or $11.20 per unit. During the year, the company purchased 36,400 liters of raw material at a price of $7.40 per liter and used 32,060 liters of the raw material to produce 20,100 units of work in process. 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 purchase of raw materials is recorded, which of the following entries will be made? Multiple Choice () $14,560) in the Materials Quantity Varlance column O ($14.560) In the Materials Price Variance column $14.560 in the Materials Price Variance column o 0 $14.560 in the Materials Quantity Varlance column o

Answer 1

Answer to first question in the list (Bialas Corp.) Option-(b): ($14,560) in the Materials Price Variance column Reason: In standard costing system, a standard quantity of direct materials required per unit of output and standard price per unit of direct materials will be predicted and set at the beginning of the process period itself based on past experience and market analysis. At end of the period, actual results will be compared with standards setforth, both quantity as well as price, to evaluate the efficiency and performance. Variance is nothing but the difference between standard price and quantity setforth and actual price and quantity. As it relates to cost, if actual result is less than standard setforth, it is a favorable variance; If actual result is more than standard setforth, it is an unfavorable variance; If actual result is equal to standard setforth, there is no variance. Option-(A) and (D) are incorrect because at the time of purchasing direct materials, question of quantity variance doesn't arise because it can be calculated only after actual quantity of direct materials are used in the production. So, there is a possibility for material price variance only at the time of recording purchase of direct materials.

Standard price per liter of direct material Actual price per liter of direct material purchased Unfavorable variance in direct material price per liter Actual quantity of direct materials purchased (liters) Direct material price variance at the time recording purcchase $7.00 $7.40 $0.40 ($7.00 - 7.40] 36,400 ($14,560) (-$0.40 x 36400] Therefore, option-(B) is the correct answer. That is, option-(D) is incorrect because positive price variance indicates favorable price variance but here, it is unfavorable price variance as actual price per liter of direct material is more than standard price per liter of direct material setforth.