A. Thirty gallons of the chemical Jase are heated to boiling. Jase is purchased

Question

A. Thirty gallons of the chemical Jase are heated to boiling. Jase is purchased in 55-gallon drums that cost $20 per drum B. Three gallons of the chemical Kase are added at this point and boiling continues for 30 minutes. Kase costs $1.81 per gallon C. During boiling, evaporation causes the loss of 10% of the mixture. The loss is normal, and its cost should be included in the cost of the wax produced D. After the mixture cools, 3 quarts of Lase are added and the chemical results is the product Supreme Shine. Lase cost $2.44 per gallon E. Supreme Shine is poured into 1-gallon plastic bottles and is packaged in cardboard cases holding 12 bottles. The plastic bottles cost $0.17 each and the cardboard boxes cost $0.48 each. F. Direct production labor consists of 3 minutes per gallon of good output. Packaging labor is 7 minutes per case. The direct production labor rate is $11 per hour and the packaging labor rate is $8.16 per hour G. Variable overhead is 120% and fixed overhead is 140% of total direct labor dollars Hint: Compute the cost of one gallon or one batch first STANDARD Developing Standard Costs Standard Cost Sheet Supreme Shine Quantities per Batch: Gallons Jase 30.00 Add Kase 3.00 Total to be boiled Total after boiling 90.00% 0.00 Add Lase 0.75 Total output Direct Materials: Cost Per Input Gallon Cost per Cost per Cost Of Input Batch Case Jase $20.00 per drum Kase 1.81 per gallon Lase 2.44 per gallon Bottles 0.17 per bottle Cardboard 0.48 per case Direct Labor: Cost Per Hourly Gallon Cost per Cost per Rate Of Output Batch Case Production labor $11.00 Packaging labor 8.16 Factory Overhead Cost Per Factory Overhead Gallon Cost per Cost per Rate Of Output Batch Case Variable 120% Fixed 140% TOTAL STANDARD COST PER CASE $37.02

Explanation / Answer

Standard costing is an important subtopic of cost accounting. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead. Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variances. Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs. If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned. If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit. The sooner that the accounting system reports a variance, the sooner that management can direct its attention to the difference from the planned amounts. If we assume that a company uses the perpetual inventory system and that it carries all of its inventory accounts at standard cost (including Direct Materials Inventory or Stores), then the standard cost of a finished product is the sum of the standard costs of the inputs: 1. Direct material 2. Direct labor 3. Manufacturing overhead a. Variable manufacturing overhead b. Fixed manufacturing overhead Usually there will be two variances computed for each input: Input for Product Variance #1 Variance #2 Direct material Price (or cost) Usage (or quantity) Direct labor Rate (or cost) Efficiency (or quantity) Manufacturing overhead-variable Spending Efficiency Manufacturing overhead-fixed Budget Volume Sample Standards Table Let's assume that your Uncle Pete runs a retail outlet that sells denim aprons in two sizes. Pete suggests that you get into the manufacturing side of the business, so on January 1, 2012 you start up an apron production company called DenimWorks. Using the best information at hand, the two of you compile the following estimates to use as standards for 2012: Standards Table for DenimWorks Large Apron Small Apron Denim material needed for each apron* 2.0 yd. 1.3 yd. Time required to cut and sew each apron 0.3 hr. 0.2 hr. Denim cost per square yard $3 Labor cost per hour (includes payroll taxes) $10 Electricity and supplies used per hour of labor $2 Rent for space per month (includes heat/air) $600 Rent for equipment per month $100 Planned production for the year 2012 5,000 aprons 3,000 aprons Planned yards of denim needed for 2012 13,900 yd. 10,000 yd. 3,900 yd. Planned hours to cut and sew in 2012 2,100 hr. 1,500 hr. 600 hr. *The denim comes on rolls that are one yard wide, so one yard (yd.) of denim is the same as one square yard of denim. The aprons are easy to produce, and no apron is ever left unfinished at the end of any given day. This means that your company never has work-in-process inventory. When we make your journal entries for completed aprons (shown below), we'll use an account called Inventory-FG which means Finished Goods Inventory. (Some companies will use WIP Inventory or Work-in-Process Inventory). We'll also use the account Direct Materials Inventory. (Other account titles often used for direct materials are Raw Materials Inventory or Stores.) Direct Materials Purchased: Standard Cost and Price Variance Direct materials refers to just that—raw materials that are directly traceable into a product. In your apron business the direct material is the denim. (In a food manufacturer's business the direct materials are the ingredients such as flour and sugar; in an automobile assembly plant, the direct materials are the cars' component parts). DenimWorks purchases its denim from a local supplier with terms of net 30 days, FOB destination. This means that title to the denim passes from the supplier to DenimWorks when DenimWorks receives the material. When the denim arrives, DenimWorks will record the denim received in its Direct Materials Inventory at the standard cost of $3 per yard (see standards table above) and will record the liability at the actual cost for the amount received. Any difference between the standard cost of the material and the actual cost of the material received is recorded as a purchase price variance. Examples of Standard Cost of Materials and Price Variance Let's assume that on January 2, 2012 DenimWorks ordered 1,000 yards of denim at $2.90 per yard. On January 8, 2012 DenimWorks receives 1,000 yards of denim and an invoice for the actual cost of $2,900. On January 8, 2012 DenimWorks becomes the owner of the material and has a liability to its supplier. On January 8 DenimWorks' Direct Materials Inventory is increased by the standard cost of $3,000 (1,000 yards of denim at the standard cost of $3 per yard), Accounts Payable is credited for $2,900 (the actual amount owed to the supplier), and the difference of $100 is credited to Direct Materials Price Variance. In general journal format the entry looks like this: Date Account Name Debit Credit Jan. 8, 2012 Direct Materials Inventory 3,000 Accounts Payable 2,900 Direct Materials Price Variance 100 The $100 credit to the price variance account communicates immediately (when the denim arrives) that the company is experiencing actual costs that are more favorable than the planned, standard cost. In February, DenimWorks orders 3,000 yards of denim at $3.05 per yard. On March 1, 2012 DenimWorks receives the 3,000 yards of denim and an invoice for $9,150 due in 30 days. On March 1, the Direct Materials Inventory account is increased by the standard cost of $9,000 (3,000 yards at the standard cost of $3 per yard), Accounts Payable is credited for $9,150 (the actual cost of the denim), and the difference of $150 is debited to Direct Materials Price Variance as an unfavorable price variance: Date Account Name Debit Credit Mar. 1, 2012 Direct Materials Inventory 9,000 Direct Materials Price Variance 150 Accounts Payable 9,150 After the March 1 transaction is posted, the Direct Materials Price Variance account shows a debit balance of $50 (the $100 credit on January 2 combined with the $150 debit on March 1). A debit balance in a variance account is always unfavorable—it shows that the total of actual costs is higher than the total of the expected standard costs. In other words, your company's profit will be $50 less than planned unless you take some action. On June 1 your company receives 3,000 yards of denim at an actual cost of $2.92 per yard for a total of $8,760 due in 30 days. The entry is: Date Account Name Debit Credit June 1, 2012 Direct Materials Inventory 9,000 Direct Materials Price Variance 240 Accounts Payable 8,760 Direct Materials Inventory is debited for the standard cost of $9,000 (3,000 yards at $3 per yard), Accounts Payable is credited for the actual amount owed, and the difference of $240 is credited to Direct Materials Price Variance. A credit to the variance account indicates that the actual cost is less than the standard cost. After this transaction is recorded, the Direct Materials Price Variance account shows an overall credit balance of $190. A credit balance in a variance account is always favorable. In other words, your company's profit will be $190 greater than planned due to the favorable cost of direct materials. Note that the entire price variance pertaining to all of the direct materials received was recorded immediately. In other words, the price variance associated with the direct materials received was not delayed until the materials were used.

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