86 12: 10: Appendix- Recording Standard Costs and Variances

• Last updated
Dec 28, 2020

Learning Objectives

• Explain how to record standard costs and variances using journal entries.

This chapter has focused on performing variance analysis to evaluate and control operations. Standard costing systems assist in this process and often involve recording transactions using standard cost information. When accountants use a standard costing system to record transactions, companies are able to quickly identify variances. In addition, inventory and related cost of goods sold are valued using standard cost information, which simplifies the bookkeeping process.

Recording Direct Materials Transactions

Question: In Figure 12.4 “Direct Materials Variance Analysis for Jerry’s Ice Cream”, we calculated two variances for direct materials at Jerry’s Ice Cream: materials price variance and

materials quantity variance. How are these variances recorded for transactions related to direct materials?
``` ```

Materials Price Variance

The entry to record the purchase of direct materials and related price variance shown in Figure 12.4 “Direct Materials Variance Analysis for Jerry’s Ice Cream” is

Notice that the raw materials inventory account contains the actual quantity of direct materials purchased at the standard price. Accounts payable reflects the actual cost, and the materials price variance account shows the unfavorable variance. Unfavorable variances are recorded as debits and favorable variances are recorded as credits. Variance accounts are temporary accounts that are closed out at the end of the financial reporting period. We show the process of closing out variance accounts at the end of this appendix.Materials Quantity Variance

The entry to record the use of direct materials in production and related quantity variance shown in Figure 12.4 ” Direct Materials Variance Analysis for Jerry’s Ice Cream” is

Work-in-process inventory reflects the standard quantity of direct materials allowed at the standard price. The reduction in raw materials inventory reflects the actual quantity used at the standard price, and the materials quantity variance account shows the favorable variance.

Recording Direct Labor Transactions

Question: In Figure 12.6 ” Direct Labor Variance Analysis for Jerry’s Ice Cream”, we calculated two variances for direct labor at Jerry’s Ice Cream: labor rate variance and labor efficiency variance. How are these variances recorded for transactions related to direct labor?

``` ```

Labor Rate and Efficiency Variances

The entry to record the cost of direct labor and related variances shown in Figure 10.6 “Direct Labor Variance Analysis for Jerry’s Ice Cream” is

Work-in-process inventory reflects the standard hours of direct labor allowed at the standard rate. The labor rate and efficiency variances represent the difference between work-in-process inventory (at the standard cost) and actual costs recorded in wages payable.

Recording Manufacturing Overhead Transactions

Question: As discussed in Chapter 5 “How Is Job Costing Used to Track Production Costs?”, the manufacturing overhead account is debited for all actual overhead expenditures and credited when overhead is applied to products. At the end of the period, the balance in manufacturing overhead , representing overapplied or underapplied overhead , is closed out to

cost of goods sold. This overapplied or underapplied balance can be explained by combining the four overhead variances summarized in this chapter in Figure 12.4 “Comparison of Variable and Fixed Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream”. How are these variances recorded for transactions related to manufacturing overhead?
Answer
``` ```

Question: Review all the debits to work-in-process inventory throughout this appendix and you will see the following costs (all recorded at standard cost):

How are these costs transferred from work-in-process inventory to finished good inventory when the goods are completed?

``` ```

Recording Cost of Goods Sold Transactions

Question: How do we record the costs associated with products that are sold?

Answer
``` ```

Closing Manufacturing Overhead and Variance Accounts

Question: At the end of the period, Jerry’s Ice Cream has balances remaining in manufacturing overhead along with all the variance accounts. These accounts must be closed out at the end of the period. How is this accomplished?

Answer
``` ```

Key Takeaway

In a standard costing system, all inventory accounts reflect standard cost information. The difference between standard and actual data are recorded in the variance accounts and the

manufacturing overhead account, which are ultimately closed out to cost of goods sold at the end of the period.

Review problem 12.9

1. Using the solution to Note 12.3 “Review Problem 12.3”, prepare a journal entry to record the purchase of raw materials.
2. Using the solution to Note 12.3 “Review Problem 12.3”, prepare a journal entry to record the use of raw materials.
3. Using the solution to Note 12.4 “Review Problem 12.4”, prepare a journal entry to record direct labor costs.
4. Using the solutions to Note 12.49 “Review Problem 12.5” and Note 12.67 “Review Problem 12.8”, prepare a journal entry to record actual variable and fixed
manufacturing overhead expenditures.
5. Using the solutions to Note 12.49 “Review Problem 12.5” and Note 12.67 “Review Problem 12.8”, prepare a journal entry to record variable and fixed
manufacturing overhead applied to products.
6. Based on the entries shown in items 1 through 5, prepare a journal entry to transfer all work-in-process inventory costs to
finished goods inventory.
7. Assume all finished goods are sold during the period. Prepare a journal entry to transfer all finished goods inventory costs to cost of goods sold.
8. Based on the entries shown in items 1 through 7, close manufacturing overhead and all variance accounts to cost of goods sold.
Answer
``` ```

License

Cost Accounting Copyright © 2023 by William (Bill) Bonner is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.