Using standard costs to record inventory transactions
Response to the following problem:
York Co. uses a standard cost system. When raw materials are purchased, the standard cost of the raw materials purchased is recorded as an increase in the Raw Materials Inventory account. When raw materials are used, the standard cost of the materials allowed for the units produced is recorded as an increase in the Work in Process Inventory account. Likewise, the standard cost of direct labor and variable manufacturing overhead is recorded as an increase in Work in Process Inventory.
Required:
a. Explain where in the financial statements the difference between the actual and standard cost of raw materials purchased will be recorded.
b. In this system, under what circumstances will the increases and decreases in the Finished Goods Inventory account (due to production and sales, respectively) represent the actual cost of products made and sold?
c. How does the accounting for overapplied or underapplied overhead, differ from York Co.'s cost accounting system?