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:

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?

 

Explanation

1.

The cost of goods sold will increase by:

Materials price variance	$	3,525
Materials quantity variance		(9,250	)
Labor rate variance		4,025
Labor efficiency variance		6,725
Fixed overhead budget variance		1,425
Fixed overhead volume variance		(6,000	)
Increase in cost of goods sold	$	450

2.

The first step is to compute the number of units sold as follows:

Total sales (a)	$	603,500
Selling price per unit (b)	$	170
Number of units sold (a) ÷ (b)		3,550

Cost of goods sold at standard (3,550 units × $134) = $475,700

3.

The ending balance in Retained Earnings is computed as follows:

Beginning balance in retained earnings	$	65,000
Net operating income		72,850
Ending balance in retained earnings	$	137,850

Thanks