The standard operating capacity of Corona manufacturing Co. is 1,000 units. A de

Question

The standard operating capacity of Corona manufacturing Co. is 1,000 units. A detailed study of the manufacturing data relating to the standard production cost of one product revealed the following:

1. two pounds of materials are needed to produce one unit.

2. the standard unit cost of materials is $8 per pound.

3. it takes 1 hour of labor to produce one unit.

4. standard labor rate is $10 per hour.

5. standard overhead for this volume is $4,000.

a. Set up a standard cost summary showing the standard unit cost.

b. analyze the variances for labor and material.

C. make journal entries to record the transfer to work and process of :

1.materials cost

2. labor costs

3. overhead costs (when making these entries included the variances)

D. prepare the journal entry to record the transfer of cost to the finished goods account.

Question 1:

1,000 units were started and finished

Case 1: all prices and quantities for the cost elements are standard, except for materials cost, which is $8.50 per pound.

Case 2: all prices and quantities for the cost elements are standard, except that 1,900 lb of materials were used.

Question 2

1,000 units were started and finished

Case 1: all prices and quantities are standard, except for the labor rate, which is $10.20 per hour.

Case 2: all prices and quantities are standard, except for labor hours, which totaled 900.

Question 3

All of the deviations listed in the two above questions took place and 900 units were started and finished.

Explanation / Answer

Standard costingis 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 asvariances.

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.

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 theperpetual inventory systemand 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:

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

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 haswork-in-process inventory.

When we make your journal entries for completed aprons (shown below), we'll use an account calledInventory-FGwhich means Finished Goods Inventory. (Some companies will use WIP Inventory or Work-in-Process Inventory). We'll also use the accountDirect Materials Inventory. (Other account titles often used for direct materials are Raw Materials Inventory orStores.)

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

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