1. Standard Cost Systems: A Financial Reporting Perspective Using Microsoft Excel
Appendix 10B

2. Prepare an income statement using a standard cost system.
Learning Objective 5
Prepare an income statement using a standard cost system.

3. Fundamental Accounting Equations – Balance Sheet
The balance sheet is based on the accounting equation as shown below:
Assets = Liabilities + Stockholders’ Equity

4. Fundamental Accounting Equations – Retained Earnings
The ending balance in retained earnings is computed using the following equation:
Ending Balance
In Retained Earnings
Beginning Balance in
Retained Earnings
Net
Operating
Income
Dividends = + -

5. Four Key Assumptions
Work in Process and Finished Goods are carried at standard cost.
Clearing accounts begin and end with a zero balance.
Only Cash, Raw Materials, Work in Process, Finished Goods, and Property, Plant, and Equipment, net, accumulated depreciation, and Retained Earnings are used here.
Positive numbers increase accounts; negative numbers decrease accounts.

6. Standard Cost System – An Example
Dexter Company produces only one product and uses a standard cost system for internal management reporting and financial reporting. Dexter uses a plantwide predetermined overhead rate based on direct labor-hours. All of the company’s manufacturing overhead is fixed. The predetermined overhead rate is based on fixed overhead of $59,500 and 7,000 direct labor-hours, producing a rate of $8.50 per direct labor-hour.

7. Standard Cost System – An Example: Beginning Balance Sheet
Dexter Company’s beginning Balance Sheet for 2017.

8. Standard Cost System – An Example: Standard Cost Card

9. Summary of Transactions – Part 1
During the year, Dexter Company completed the following transactions:
Purchased 19,000 pounds of raw material for cash at a price of $5.75 per pound.
Added 20,150 pounds of raw material to work in process to produce 6,500 units.
Assigned direct labor costs to work in process. The direct laborers (who were paid in cash) worked 6,700 hours at an average cost of $16.50 per hour to manufacture 6,500 units.
Applied fixed overhead to work in process 6,500 units at $8.50 per unit, or $55,250. Actual fixed overhead costs for the year were $54,000. Of this total, $21,000 related to items such as insurance, utilities, and indirect labor salaries that were all paid in cash and $33,000 related to depreciation of manufacturing equipment.
Transferred 6,500 units from work in process to finished goods.
Sold (for cash) 6,000 units to customers at a price of $70.00 per unit.
Transferred the standard cost associated with the 6,000 units sold from finished goods to cost of goods sold.
Paid $25,000 of selling and administrative expenses.
Closed all standard cost variances to cost of goods sold.

10. Summary of Transactions – Part 2

11. Calculating the Variances – Materials
Material price variance:
Material price variance = AQ(AP – SP)
Material price variance = 19,000 pounds($ $6.00)
Material price variance = $4,750 F
Material quantity variance:
Material quantity variance = SP(AQ – SQ)
Material quantity variance = $6.00 per pound(20, ,500)
Material quantity variance = $3,900 U

12. Calculating the Variances – Labor
Labor rate variance:
Labor rate variance = AH(AR – SR)
Labor rate variance = 6,700 hours($ $17.00)
Labor rate variance = $3,350 F
Labor efficiency variance:
Labor efficiency variance = SR(AH – SH)
Labor efficiency variance = $17.00 per unit(6, ,500)
Labor efficiency variance = $3,400 U

13. Calculating the Variances – Overhead
Fixed overhead budget variance:
Fixed overhead budget variance = Actual FOH – Budgeted FOH
Fixed overhead budget variance = $54,000 - $55,250
Fixed overhead budget variance = $1,250 F
Fixed overhead volume variance:
Fixed overhead volume variance = Budgeted FOH – FOH applied to Work in process
Fixed overhead volume variance = $55,250 – $56,950
Fixed overhead volume variance = $1,700 U

14. Recording the Transactions

15. Preparing the Income Statement
The income statement is shown. Notice that cost of goods sold is reported at standard and the total variance adjustments are added to this amount to arrive at an adjusted cost of goods sold amount of $158,650.
Dexter Company
Income Statement
For Year Ended 12/31/17
(dollars in thousands)
Sales
$420,000
Cost of goods sold at standard
$ 261,000
Total variance adjustments
350
Cost of goods sold
261,350
Gross margin
158,650
Selling and administrative expenses
$ 25,000
Net operating income
$ 133,650

16. End of Appendix 10B