Recording Variances
Practice As You Learn
Cost Accounting
Follow these steps when asked to record inventory cost variances.
1) Compute the variances:
AQ x AP AQ x SP SQ x SP
Actual – credit Standard – debit
The actual amount spent (on the left) will always be the credit amount.
The standard amount (on the right) will always be the debit amount.
Inventory accounts are initially recorded at standard – debits increase inventory
2) Record the same journal entries for job order costing.
Add the variance account in the middle of the journal entry.
Material Purchases:
Raw Materials – standard
Accounts Payable – actual
Material Used
WIP – standard
———
Raw Materials – actual
Direct Labor Used:
WIP – standard
——–
——–
Salaries Payable – actual
Variable and Fixed Manufacturing Overhead
WIP – standard
——-
——-
Manufacturing overhead – actual
3) Add the balances for RM, WIP, FG, and CGS to get the total inventory costs:
4) Find the percentage for each of the total and allocate the material price variance to all 4 accounts based on the % of the total
| RM | RM / total = % |
| WIP | WIP / total = % |
| FG | FG / total = % |
| CGS | CGS / total = % |
| Total | 100% |
5) Make the material price variance be 0.
Debit if it has a credit balance.
Credit if it has a debit balance.
The 4 accounts (RM, WIP, FG, CGS) will be the opposite debit or credit to balance the journal entry.
6) Repeat step 4 for WIP, FG, CGS only. Find new percentages.
7) Total all the variances (except material price variance), netting debits with credits to get a net total.
8) Take the total net variance x each % for WIP, FG, and CGS to get the amount to record for each.
9) Make each material used, labor, and overhead variance account equal to 0.
Debit if it has a credit balance.
Credit if it has a debit balance.
The 3 accounts will be the opposite debit or credit required to balance the journal entry.
Do not allocate immaterial variances to RM, WIP, FG, and CGS.
0 out variances with a debit or credit and move them to CGS to balance the entry.
Variable Product Costs Variance – Practice as You Learn Problem
A. Using the following variance computation, record the inventory costs at standard and the variances.
B. Allocate the variances to inventory accounts given the accounts have the following unadjusted balances:
| Raw Materials | $184,845 |
| Work In Process | $ 11,456 |
| Finished Goods | $ 79,241 |
| Cost of Goods Sold | $756,295 |
Material:
|
AQ x AP AQ x SP AQ x SP SQ x SP $46,210 15,000 x $3 15,300 x $3 5,200 x 3 x $3 Variance $1,210 U $900 F |
Labor:
|
AQ x AP AQ x SP SQ x SP $239,500 24,860 x $10 5,200 x 5 x $10 Variance $9,100 F $11,400 F |
Variable Overhead:
|
AQ x AP AQ x SP SQ x SP $168,600 24,860 x $7 5,200 x 5 x $7 Variance $5,420 F $7,980 F |
Fixed Overhead
|
Actual Budget Applied $213,065 $225,000 $216,094 Variance $11,935 F $8,906 U |
Answer
A. Journal Entries to record inventory costs at standard and variances:
| Raw Materials Inventory 45,000 RM Purchase Price Variance 1,210 A/P 46,210 |
| WIP 46,800 Material Quantity Variance 900 Raw Materials Inventory 45,900 |
| WIP 260,000 Labor Rate Variance 9,100 Labor Efficiency Variance 11,400 Wages Payable 239,500 |
| WIP 182,000 Spending Variance 5,420 Efficiency Variance 7,980 Manufacturing Overhead 168,600 |
| WIP 216,094 Volume Variance 8,906 Budget Variance 11,935 Manufacturing Overhead 213,065 |
B. Allocate the variances to inventory accounts:
First: Determine the percentages to use to allocate:
| Raw Materials | $ 184,845 = .179 |
| Work In Process | $ 11,456 = .011 |
| Finished Goods | $ 79,241 = .077 |
| Cost of Goods Sold | $ 756,295 = .733 |
| Total | $1,031,837 |
| Work In Process | $ 11,456 = .014 |
| Finished Goods | $ 79,241 = .093 |
| Cost of Goods Sold | $ 756,295 = .893 |
| Total | $ 846,992 |
Second –
Close out the raw material price variance –
It is a debit, so credit it to make it 0
Then debit the other 4 accounts for the % computed above of the 1,210.
| Raw Materials | $ 217 |
| Work in Process | $ 13 |
| Finished Goods | $ 93 |
| Cost of Goods Sold | $ 887 |
| Raw Material Price Variance | $ 1,210 |
Third – net the other variance together:
| Material quantity variance | (900) credit |
| Labor Rate Variance | (9,100) credit |
| Labor Efficiency Variance | (11,400) credit |
| SpendingVariance | (5,420) credit |
| Efficiency Variance | (7,980) credit |
| Budget Variance | (11,935) credit |
| Volume Variance | 8,906 debit |
| Total Variance | (37,829) credit |
Fourth – Determine the amount of the total to allocated to each inventory account using the % computed above. Multiply the total net by the % previously computed. Make the net variance go to 0 with a debit and the inventory accounts will be credits.
Fifth – Make the variance accounts go to 0.
| Material Quantity Variance | $ 900 |
| Labor Rate Variance | $ 9,100 |
| Labor Efficiency Variance | $11,400 |
| Spending Variance | $ 5,420 |
| Efficiency Variance | $ 7,980 |
| Budget Variance | $11,935 |
| Volume Variance | $ 8,906 |
| Work In Process | $ 530 |
| Finished Goods | $ 3,518 |
| Cost of Goods Sold | $33,781 |
Important to Note:
The standard amount is always the debit for the amount inventory is initially recorded
The actual amount is always the credit for the amount that is paid.
Variance accounts are closed by recording the opposite of what was originally recorded.