Question

Swain Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. The company’s beginning balance in Retained Earnings is $65,000. It sells one product for $170 per unit and it generated total sales during the period of $603,500 while incurring selling and administrative expenses of $54,500. Swain Company does not have any variable manufacturing overhead costs and its standard cost card for its only product is as follows: (1) Standard Quantity or Hours (2) Standard Price or Rate Standard Cost (1) x (2) Direct materials 7.0 pounds $ 9 per pound $ 63 Direct labor 2.0 hours $ 12 per hour 1 Fixed manufacturing overhead 3.5 hours $ 20 per hour 70 Total standard cost per unit $ 134 During the period, Swain recorded the following variances: Materials price variance $ 3,525 U Materials quantity variance $ 9,250 F Labor rate variance $ 4,025 U Labor efficiency variance $ 6,725 U Fixed overhead budget variance $ 1,425 U Fixed overhead volume variance $ 6,000 F Required: 1. When Swain closes its standard cost variances, the cost of goods sold will increase (decrease) by how much? 2. Prepare an income statement for the year. 3. What is Swain’s ending balance in Retained Earnings?

Answer 1

1.

The cost of goods sold will increase by $450.

Description	Amount
Material price variance	3525
Material quantity variance	-9250
Labor rate variance	4025
Labor efficiency variance	6725
Fixed overhead budget variance	1425
Fixed overhead volume variance	-6000
Increase in cost of goods sold	450

.

2.

Particulars	Amount ($)	Amount ($)
Sales revenue		603500
Less: Cost of goods sold at standard (603500 / 170*134)	-475700
Total variance adjustments	-450
Cost of goods sold		-476150
Gross margin		127350
Selling and administrative expenses		-54500
Net operating income		72850

.

3.

Ending balance in retained earnings = Beginning balance + Net operating income

Ending balance in retained earnings = $65000 + $72850

Ending balance in retained earnings = $137850