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


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.