Question

Karim 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 standard cost card for the company’s only product is as follows:

Inputs	Standard Quantity or Hours		Standard Price or Rate			Standard Cost
Direct materials	1.5	gallons	$	9.00	per gallon	$	13.50
Direct labor	0.70	hours	$	21.50	per hour		15.05
Fixed manufacturing overhead	0.70	hours	$	9.00	per hour		6.30
Total standard cost per unit						$	34.85

During the year, the company started and completed 31,500 units. Direct labor employees worked 23,650 hours at an average cost of $19.50 per hour.

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 direct labor costs, the Work in Process inventory account will increase (decrease) by:

Answer 1

Work in process inventory account will increase by $474,075 (31,500 units * $15.05 per unit)

In Standard costing system standard costs are used to record transactions. The difference between standard costs and actual costs are recorded as variance which can be due to rate variance or efficiency variance. Hence in the given case, Work in process inventory account will be debited at standard labor cost for actual output. Since labor cost is recorded the Work in process account balance will increase.