Kouba Manufacturing Corporation's actual direct labor cost for the month of July was $45,000. Its labor rate variance for July was $1,000 unfavorable. Its labor efficiency variance was $5,000 favorable. What summary journal entry would Kouba make to record this information?

Question

Quizplus · Accepted Answer

The actual direct labor cost is recorded in the Direct Labor account, and since it is an actual amount, it will be recorded at face value, i.e., $45,000. The labor rate variance, being unfavorable, means that the labor was more expensive than expected, and hence it is treated as an overhead expense and recorded in the Manufacturing Overhead account. The labor efficiency variance, being favorable, means that the company used less labor hours than expected, and hence it is treated as a direct labor cost and subtracted from the Direct Labor account.

Therefore, the journal entry would be:
Direct Labor: $45,000
Manufacturing Overhead: $1,000
Direct Labor Efficiency Variance: $5,000

Note: The labor rate variance is not recorded in the journal entry as it is an overhead expense and not a direct labor cost.

Kouba Manufacturing Corporation's Actual Direct Labor Cost for the Month