Journal Entry for Direct Materials Variance
Journal Entry for Direct Materials Variance
In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current year?
A) Debit to direct material efficiency variance for $10,000
B) Credit to direct material efficiency variance for $10,000
C) Debit to direct material efficiency variance for $12,000
D) Debit to direct material efficiency variance for $12,000
Credit to direct material efficiency variance for $10,000 is correct. The direct material efficiency variance focuses on how efficient the company was with direct materials in the production process.
Step 1) We start by taking actual materials used of 4,000 pounds and subtracting 6,000 pounds of budgeted material, which results in a difference of 2,000 pounds. They were more efficient since they used less material than they had budgeted.
Step 2) We then multiply the 2,000-pound difference by the standard direct material price of $5 per pound, which results in a favorable direct material efficiency variance of $10,000.
For the journal entry, we would debit inventory (raw materials) for the standard quantity of 6,000 pounds and a standard price of $5, which equals $30,000. There would also be a debit to the direct materials price variance for $12,000 as the company paid $8 per pound instead of $5 per pound ($3 price difference x 4,000 pounds = $12,000 variance). We would then credit the direct material usage/efficiency variance account for $10,000, and then the remaining credit would be to accounts payable for $32,000 based on the actual quantity and price paid (4,000 pounds x $8 per pound = $32,000).
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