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 $59,000. It sells one product for $176 per unit and it generated total sales during the period of $635,360 while incurring selling and administrative expenses of $55,100. 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	8.0	pounds	$	9	per pound	$	72
Direct labor	2.0	hours	$	12	per hour		24
Fixed manufacturing overhead	2.0	hours	$	20	per hour		40
Total standard cost per unit						$	136

During the period, Swain recorded the following variances:

Materials price variance	$	3,675	U
Materials quantity variance	$	9,550	F
Labor rate variance	$	4,175	U
Labor efficiency variance	$	6,875	U
Fixed overhead budget variance	$	1,575	U
Fixed overhead volume variance	$	6,600	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?

Required 1.

When Swain closes its standard cost variances, the cost of goods sold will increase (decrease) by how much?

The cost of goods sold will increase

by

Required 2.

Swain Company

Income Statement

For the year

Sales
Cost of goods sold at standard
total variance adjustments
cost of goods sold
gross margin
selling and administrative expenses
net operating income

Required 3.

Ending balance in retained earnings:

Answer 1

Required 1.

The cost of goods sold will increase by $150 .

Required 2.

Swain Company

Income Statement

For the year

Sales $635,360

Cost of goods sold at standard $490,960

Total variance adjustments $ 150

Cost of goods sold $491,110

Gross margin $144,250

Selling and administrative expenses $ 55,100

Net operating income $ 89,150

Required 3.

Ending balance in retained earnings : $148,150 .

Calculations:

1.

Materials price variance $3,675

Materials quantity variance $(9,550)

Labor rate variance $4,175

Labor efficiency variance $6,875

Fixed overhead budget variance $1,575

Fixed overhead volume variance $(6,600)

Increase in cost of goods sold $ 150

2.

Total sales (a) $635,360

Selling price per unit (b) $ 176

Number of units sold (a) ÷ (b) 3,610

Cost of goods sold at standard = 3,610 units × $136 = $490,960

3.

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

= $59,000 + $89,150 = $148,150