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Standard Cost Change - Manufacturing Orders
Standard Cost Change - Manufacturing Orders
The value of work in process inventory must be adjusted to reflect changes in material, labor, burden, or outside processing costs.
Manufacturing Order opened in Period 1 but not completed.
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10
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components issued to order in Period 1
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1.5000000
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accounting cost of component at end of Period 1
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2.0000000
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accounting cost of component at end of Period 2
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100
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labor hours incurred in Period 1
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10.00
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hourly labor rate at end of Period 1
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12.00
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hourly labor rate at end of Period 2
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Journal Entries in Period 2:
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DR
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Work In Progress
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205.00
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CR Standard Cost Change - MOs
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205.00
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The standard cost journal entry amount was calculated as:
10 units * ( 2.00 - 1.50)
+100 hours * (12.00 - 10.00)
This journal entry adjusts only the costs that had been incurred when the accounting period began. Costs that were incurred in Period 2 were valued at the new standard.
It should be noted that the change in the standard cost of the cost components (material, labor, etc.) will also result in a change in the standard cost of the manufactured item. When value is removed from work in process (i.e. the receipt against the manufacturing order is recorded), it will be removed at the new standard. Thus, an imbalance in the work-in-process account would have resulted if the costs that were incurred in Period 1 had not been revalued.