Standard Costs Recording Variances in the Accounts.

Standard CostsRecording Variances in the Accounts

© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 2

Introduction

The lecture presentation explained the importance of using standard costs in manufacturing operations. The calculation of variances from standards and reporting these variances to management provides useful information for decision making purposes

Journal entries are needed to accumulate and report actual and standard costs in the accounting system. This presentation tells “the rest of the story” by illustrating the necessary entries.


Things You Will Need

• Original exercise presented in lecture (from note taking guide)

• Calculations of variances from the exercise (notes you took in lecture)

• Sheet on which to take notes for this presentation


The example from lecture is the basis for this illustration. Refer to those calculations when reminded with


Standards in the AccountsRM

WIP

FG

COGS

FL

MOThe same “flow of costs” diagram becomes the basis for recording standard costs and variances in the accounts.



WIP

FG

COGS

FL

MO

Six new accounts must be added to the diagram for recording the variances.


Purchase of Raw MaterialsRM

WIP

FG

COGS

A x S

FL

MOStandard costs are introduced into the accounting system when goods are acquired. The actual quantity acquired is recorded at the standard price.


Materials Price VarianceRM

WIP

FG

COGS

A x S

FL

MOStandard costs are introduced into the accounting system when goods are acquired. The actual quantity acquired is recorded at the standard price.

MPV

u f

The difference between the price paid and the price that should have been paid is the Materials Price Variance.


JournalRaw Materials (7,200 A x $12 S) 86,400

Materials Price Variance 3,600

Accts Payable (7,200 A x $11.50 A) 82,800Raw Materials is debited with the actual quantity times the standard price. The credit to Accounts Payable reflects the amount owed to the supplier at their prices. Since the Materials Price Variance is favorable, it is credited for the difference.


Lecture Calculation


Materials RequisitionedRM

WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

u f

Actual direct materials used are credited to RM while WIP is debited with the standard amount which should have been used.


Materials Quantity VarianceRM

WIP

FG

COGS

A x S

FL

MO

Actual direct materials used are credited to RM while WIP is debited with the standard amount which should have been used.

The difference between the standard quantity that should have been used and the actual quantity used is the Materials Quantity Variance.

MPV

A x S

S x S

MQV

u f

u f


JournalRaw Materials (7,200 A x $12 S) 86,400

Materials Price Variance 3,600

Accts Payable (7,200 A x $11.50 A) 82,800

Work in Process (7,000 S x $12 S) 84,000

Materials Quantity Variance 2,400

Raw Materials (7,200 A x $12 S) 86,400

This entry is based on the calculations made previously. The MQV is debited to indicate it is unfavorable.


Lecture Calculation


Factory Labor IncurredRM

WIP

FG

COGS

A x S

FL

MOFactory Labor is debited for the actual hours worked at the standard price established. Wages Payable is credited with actual hours worked at the actual rate of pay.

MPV

A x S

S x S

MQV

u f

u fA x S


Labor Price VarianceRM

WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

Factory Labor is debited for the actual hours worked at the standard price established. Wages Payable is credited with actual hours worked at the actual rate of pay.

LPV

u f

A x S

The difference between the actual price paid and the standard rate which should have been paid is the Labor Price Variance.


JournalFactory Labor (1,850 A x $15 S) 27,750

Labor Price Variance 925

Wages Payable (1,850 A x $15.50 A) 28,675Employees deserve to be paid for the actual hours worked at the actual rate of pay agreed. Standards for labor are introduced by debiting Factory Labor for the standard price. In this case the LPV is unfavorable.


Lecture Calculation


Factory Labor AssignedRM

WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

Standard hours are used to assign Factory Labor costs to production yet Factory Labor is credited for actual hours employees worked.

LPV

u f

A x S

S x S

A x S


Labor Quantity VarianceRM

WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

Standard hours are used to assign Factory Labor costs to production yet Factory Labor is credited for actual hours employees worked.

LPV

u f

A x S

S x S

A x SLQV

The Labor Quantity Variance is the difference between the actual hours worked and the standard hours which should have been worked.

u f


JournalFactory Labor (1,850 A x $15 S) 27,750

Labor Price Variance 925

Wages Payable (1,850 A x $15.50 A) 28,675

Work in Process (2,000 S x $15 S) 30,000

Labor Quantity Variance 2,250

Factory Labor (1,850 A x $15 S) 27,750

This entry is based on the calculations made previously. The LQV is credited to indicate it is favorable.


Lecture Calculation


Actual OverheadRM

WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

As demonstrated in job order and process systems, Manufacturing Overhead is debited with actual costs incurred.

LPV

u f

A x S

S x S

A x SLQV

u f

actual


JournalManufacturing Overhead 48,000

Accts Payable (etc.) 48,000


Application of OverheadRM

WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

As demonstrated in job order and process systems, Manufacturing Overhead is debited with actual costs incurred.

LPV

u f

A x S

S x S

A x SLQV

u f

actual

S x S

std

Overhead costs are applied to production based on the standard hours which should have been worked in producing the product.




Work in Process 42,400

Manufacturing Overhead 42,400


Overhead VariancesRM

WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

Once calculated, the overhead controllable and volume variances are reflected in the accounts.

LPV

u f

A x S

S x S

A x SLQV

u f

actual

S x S

std

O C V

O V V

u f

u f

f u




Work in Process 42,400


Overhead Controllable Var 1,600

Overhead Volume Variance 4,000


Both controllable and volume variances were unfavorable.


Lecture Calculation



WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

The “elements of cost” were debited to WIP at standard amounts.

LPV

u f

A x S

S x S

A x SLQV

u f

actual

S x S

std

O C V

O V V

u f

u f

f u


Finished GoodsRM

WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

Finished Goods are also recorded at standard amounts.

LPV

u f

A x S

S x S

A x SLQV

u f

actual

S x S

std

O C V

O V V

u f

u f

std

stdf u


JournalFinished Goods std

Work in Process std



WIP

FG

COGS

A x S

FL

MO

MPV

A x S

S x S

MQV

u f

u f

Standard amounts continue to be used to record the flow of costs through the remaining accounts.

LPV

u f

A x S

S x S

A x SLQV

u f

actual

S x S

std

O C V

O V V

u f

u f

std

std std

std

f u



Work in Process std

Accounts Receivable retail

Sales retail



Work in Process std

Accounts Receivable retail

Sales retail

Cost of Goods Sold std

Finished Goods std


Conclusion

Refer to pages 1103-1104 and Illustration 25-28 in the textbook for more information about how variances are presented in the financial statements.

Your comments and suggestions regarding the effectiveness of this presentation are encouraged and welcomed:

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Standard Costs Recording Variances in the Accounts.

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