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:

Standard

Costs per

Batch

Direct materials:

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:

Direct materials (102,500 pounds at $0.57/pound) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,425

Direct labor (4,750 hours at $6.80/hour) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,300

Manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,525

Total actual costs (200 batches) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $145,250

Standard cost of 200 batches (200 batches 3 $700 per batch) . . . . . . . . . . . . . . . . 140,000

Net unfavorable cost variance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,250

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.

Solve

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.