Asked by Arber Gashi on May 13, 2024
Verified
Lisser Corporation uses a standard cost system in which inventories are recorded at their standard costs and any variances are closed directly to Cost of Goods Sold.The standards for direct materials for the company's only product specify 2.7 liters per unit at $7.50 per liter or $20.25 per unit.During the year, the company purchased 67,300 liters of raw material at a price of $8.00 per liter and used 61,660 liters of the raw material to produce 22,800 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 recording the raw materials used in production, the Raw Materials inventory account will increase (decrease) by:
A) ($493,280)
B) $493,280
C) $462,450
D) ($462,450)
Direct Materials
Raw materials that are directly traceable to the finished product.
Standard Cost System
A method of cost accounting that uses cost estimates to predict the cost of producing a product under normal conditions, serving as a benchmark for evaluating performance.
Work in Process
Refers to the goods that are in the stages of production but are not yet complete.
- Familiarize oneself with the procedure of recording raw material transactions and their implications for inventory accounts.
Verified Answer
Actual quantity purchased = 67,300 liters
Actual price = $8.00 per liter
Actual cost = 67,300 liters x $8.00 per liter = $538,400
Standard cost = 61,660 liters x $7.50 per liter = $462,450
Materials price variance = Actual cost - Standard cost
= $538,400 - $462,450
= $75,950 unfavorable
Since the standard cost is used to value inventory, the Raw Materials inventory account will increase by the standard cost of the materials used, which is $462,450. However, the actual cost of the materials is higher, resulting in an unfavorable variance. Therefore, the Raw Materials inventory account will also be credited with the materials price variance, which is $75,950 unfavorable. This means that the Raw Materials inventory account will decrease by a total of $462,450 + $75,950 = $538,400. The answer is D. ($462,450 + $75,950 = $538,400; therefore, Raw Materials inventory will decrease by $538,400).
Learning Objectives
- Familiarize oneself with the procedure of recording raw material transactions and their implications for inventory accounts.
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