Examples

Standards (used for all examples)

Note that, for the sake of simplification, no material costs are included in these standards.

Standard Routing for Item A

Operation 1 (Drill) - Workcenter X:	50 pieces per hour	=	.02 hrs/piece
	labor-paced

Operation 2 (Polish) - workcenter Y:	Standard machine run time	=	5.0 hrs/piece
	machine-paced
	crew = 2
	average order quantity = 500
	(labor hours per piece = .02)

Standard Costs for Alternate Operation

Operation 3 (Polish) - Workcenter Z:	Standard machine run time	=	10 hours
	machine-paced
	crew = 1
	average order quantity = 500
	(labor hours per piece = .02)

Workcenter Cost Rates

Workcenter X:	Direct labor rate	=	$25.00 per hour (based on labor hours)
	Overhead rate	=	$6.00 per hour (based on labor hours)

Workcenter Y:	Direct labor rate	=	$20.00 per hour
	Overhead rate	=	$10.00 per hour (based on machine hours)

Workcenter Z:	Direct labor rate	=	$18,00 per hour
	Overhead rate	=	$10.00 per hour (based on machine hours)

Accounting Standard Costs

Operation 1:	Direct Labor	=	.02 hrs/piece * $25/hr	=	$.50 per piece
	Overhead	=	.02 hrs/piece * $6/hr	=	$.12 per piece

Operation 2:	Direct Labor	=	.02 labor hrs/piece * $20/h4	=	$.40/labor hr
	Overhead	=	.01 mach hrs/piece * $10/mach hr	=	$.10 per piece

Operation 3:	Direct Labor	=	.02 labor hrs/piece * $18/hr	=	$.36/labor hr
	Overhead	=	.02 mach hrs/piece * $10/mach hr	=	$.20/piece

Total Mfg. Cost of Item (from Routing)

$1.12/piece (labor = .90; OH = .22)

How Information is Presented (in all examples)

For each example, a table is presented that identifies major steps that occur during the manufacturing process, what calculations are performed to cost that transaction, and what journal entries are made to account for it.

For each account in the table, the Reference File category and subcategory type are identified in the table to clarify how the transactions are posted. Note that several accounts of each type might actually exist. For example, the efficiency variances calculated for open orders are actually posted to different accounts, depending on which department owns the operation where the variance is encountered.

Abbreviations

WIP = Work-in-process inventory

Inv = Inventory

Accr = Accrued

OC = Order closure variance. For option 1, this is the efficiency variance calculated by comparing actual to standard. For option 2, this is the residual or engineering variance calculated by comparing actual to planned.

Lab = Labor

OH = Overhead or Burden

Man = Manning

Eff = Efficiency variances calculated for open orders. These accounts are used only for option 2.

OP = Operation

Example 1: Variances Calculated Using Option 1

Order = 500 of Item A
Use alternate operation 3 instead of operation 2

Note: Because option 1 is used, variances are calculated against the standard routing (which specified operations 1 and 2) rather than the labor requirements (which specify operations 1 and 3).

Activity/Calculations	WIP 451-01	Inv 452-01	Accr Lab 451-11	Accr OH 451-12	Lab OC 451-22	Man OC 451-22	OH OC 451-23	Lab Eff 451-27	Man Eff 451-27	OH Eff 451-28
Record Labor at Op 1 Direct Labor Hrs = 11 (Labor Rate = $25/hr) (OH Rate = $6/hr) Qty Complete = 500	275 66		(275)	(66)
End of Period 1 No calculations (order is still open)
Record Labor at Op 3 Direct Labor Hrs = 10 Labor Rate = $18/hr Machine Hrs = 12 OH Rate = $10/hr Qty Complete = 500	180 120		(180)	(120)
Receipt Recorded Receipt of 500 Cost/piece = $1.12 Order closed	(560)	560
End of Period 2 Manning Var: 12 Mach Hrs1 crew = 12 Earn Lab Hrs Actual Lab Hrs = 10 MV = (10-12)$18/hr =$36 Labor Var: Std Lab=.90/pc500 Actual Lab = $455 LV = 455-450-MV Overhead Var: Std OH = .22/pc500 Actual OH = $186 OV = 197-110=76	36 (41) (76)				41	(36)	76

Example 2: Variances Calculated Using Option 2