Recording Variances
Things You Must Know
Cost Accounting
Journal entries for inventory movement and recording variances:
Purchase of Materials:
| Raw materials inventory Standard RM purchase price variance** Variance A/P Actual |
Material Used:
| WIP Standard Material quantity variance** Variance Raw materials inventory Actual |
Labor Used:
| WIP Standard Labor rate variance** Variance Labor efficiency variance** Variance Wages payable Actual |
Overhead:
| WIP Applied or standard ____Variance** Variance ____Variance** Variance Manufacturing overhead Actual |
** The variance account can be a debit or a credit
Unfavorable variance: debit – increases costs
Favorable variance: credit – reduces costs
These journal entries are the same entries made for job costing with the variance accounts added in the middle.
The standard amount is a debit and the actual amount is a credit.
Closing out the variance accounts:
Inventory costs (RM, WIP, FG, and CGS) are recorded at standard.
The variance account represents the difference between actual and standard.
At the end of the period, close the variance accounts (transfer) to the inventory accounts in order to adjust inventory accounts from standard to actual.
The variance amount is added or subtracted to CGS and inventory accounts so amounts reported on the financial statements are reported at actual.
Material price variance:
Allocate to RM, WIP, FG, and CGS based on the % of the total for these four account balances.
Material quantity variance and all other variances:
Allocate to WIP, FG, and CGS based on the % of the total for these three account balances.
The variances occur when making the product so the difference cannot be put to RM since the RM have not yet been used to make the product.
When variances are not material a company will take it all directly to Cost of Goods Sold.