Examples

Standards (used for all examples)

Bill of Material

	A


B (2 per)		C (1 per)

Accounting Standard Material Costs (based on Bill of Material)

C = $5
B = $10
A = 2B + C = $25

Alternate assembly using 2C = $30.00

Accounting Standard Labor Costs

Operation 1: (Polish B)	Direct Labor = .02 hrs/piece * $25/hr = $.50 per piece Overhead = .02 hrs/piece * $6/hr = $.12 per piece
Operation 2: (Polish C)	Direct Labor = .02 hrs/piece * $20/hr = $.40 per piece Overhead = .02 hrs/piece * $10/hr = $.20 per piece
Operation 3: (Assembly)	Direct Labor = .1 hr/piece * $20/hr = $2.00 per piece Overhead = .1 hr/piece * $15/hr = $1.50 per piece

Total Standard Costs

Total Standard Cost of A	=	Material Cost + Labor Cost + OH Cost
	=	25 + (.5 + .4 + 2.0) + (.12 + .20 + 1.50)
	=	25 + 2.9 + 1.82
	=	29.72

Cost of A when 2 Cs are used instead of 1 = 30 + 2.9 + 1.82 = 34.72

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 transaction 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

Pay = Payroll

OH = Accrued Overhead

OC = Order Close 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.

Scr = Scrap

Exp = Expense

Lab = Labor

OH = Overhead or Burden

Man = Manning

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

OP = Operation

Comp = Scrapped at component level (parent = scrapped at parent level)

Example 1 - Normal Scrap Processing

Order = 50 of Item A
Change requirement to use 2C per A

Note 1: Because normal scrap processing is used, no material variances will be posted until after the manufacturing order is closed.

Note 2: To simplify calculations, labor, manning, and overhead variances are calculated only after the MO is closed. For more information about these calculations, refer to the relevant key concept.

Activity/Calculations	WIP 451-01	Inv 452-01	Accr Pay 451-11	Accr OH 451-12	Mat OC Var 451-20	Labor OC Var 451-21	OH OC Var 451-23	Scrap Exp 451-30
Issue B 10010 Issue C 1005	1000 500	(1000) (500)
Record Time at Op 1 Direct Labor = 1 hr Labor Cost = $25/hr OH Cost = $6/hr	25 6		(25)	(6)
Record Scrap at Op1 Scrap =1 of C (comp) Scrap =1 of A (parent)
Record Qty Comp at 1 Quantity = 48
Record Time at Op 2 Direct Labor = 1 hr Labor Cost = $20/hr OH Cost = $10/hr	20 10		(20)	(10)
Record Scrap at Op 2 Scrap = 1 of A (parent)
Record Qty Comp at 2 Quantity = 47
End of Period 1 No calculations (order still open)
Record Scrap at Op 3 Scrap = 1 C (comp) Scrap = 1 A (parent)
Record Time at Op 3 Direct Labor = 4.5 hr Labor cost = $20/hr OH cost = $15/hr Record qty cmp = 45	90 67.5		(90)	(67.5)
Record MO receipt Quantity of A = 45 Std Cost of A = 29.72	(1337.4)	1337.4
End of Period 2 MO closed
Material Performance: Mat Cost with 2C = 30 Std Cst=30*45 = 1350 Actual Cost = 1500 1500-1350=150	(150)				150
Engineering Variance: Mat Cost with 2C=30 Mat Cost with 1C=25 EV=(30-25)*45=225	(225)				225
Labor Variance: Std Lab Cost=2.9*45=130.50 Actual Labor=135 135.00-130.50=4.50	(4.5)					4.5
OH Variance: Std OH Cost=1.82*45=81.90 Actual OH=83.5 83.50-81.90=1.60	(1.6)						1.6

Example 2 - Parent and Component Scrap Processing

Order = 50 of Item A
Substitute E instead of D

Note: To simplify calculations, labor, manning, and overhead variances are calculated only after the MO is closed. For more information about these calculations, refer to the relevant key concept.

Activity/Calculations	WIP 451-01	Inv 452-01	Accr Pay 451-11	Accr OH 451-12	Mat OC Var 451-20	Labor OC Var 451-21	OH OC Var 451-23	Scrap Exp 451-30
Issue B Issue C	1000 500	(1000) (500)
Record Time at Op 1 Direct Labor = 1 hr Labor Cost = $25/hr OH Cost = $6/hr	25 6		(25)	(6)
Record Scrap at Op 1 Scrap=1 of C (comp) Scrap=1 of A (parent)
Record Qty Comp at 1 Quantity = 48
Record Time at Op 2 Direct Labor = 1 hr Labor Cost = $20/hr OH Cost = $10/hr	20 10		(20)	(10)
Record Scrap at Op 2 Scrap = 1 of A (parent)
Record Qty Comp at 2 Quantity = 47
End of Period 1 Cost of Scrap Calc: 1C comp at 1 = 5 1 parent after 1=30+.50+.12 1 parent after 2=30+.90+.32	(5) (30.62) (31.22)							5 30.62 31.22
Record Scrap at Op 3 Scrap=1 C (comp) Scrap=1 A (parent)
Record Time at Op 3 Direct Labor=4.5 hr Labor cost=$20/hr OH cost=$15/hr Record qty cmp=45	90.0 67.5		(90)	(67.5)
Record MO Receipt Quantity of A=45 Std Cost of A=29.72	(1337.4)	1337.4
End of Period 2 MO closed
Cost of Scrap: 1 C comp at 3=5 1 A after 3=30+2.9+1.82=34.72	(5) (34.72)							5 34.72
Material Performance: Std Cst =1350 Actual Cost =1500 Cost of Scrap = 100 50	(50)				50
Engineering Variance: Mat Cost with 2C=30 Mat Cost with 1C=25 EV=(30-25)*45=225	(225)				225
Labor Variance: Std Lab Cost =2.9*45=130.5 Actual Labor =135.0 Cost of Scrap = 4.3 LV= Act - Std - Scr = .2	(.2)					.2
OH Variance: Std OH Cost =1.82*45= 81.90 Actual OH = 83.50 Cost of Scrap = 2.26 OV= Act-Std-Scr = - .66	.66						(.66)

Example 3 - Parent Only Scrap Processing