Standard Costs
Recording Variances in the Accounts
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
2
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
3
The example from lecture is the basis
for this illustration. Refer to those
calculations when reminded with
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
4
Standards in the Accounts
RM
FL
The same “flow of costs”
diagram becomes the basis
for recording standard costs
and variances in the
accounts.
WIP
MO
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
FG
COGS
5
Standards in the Accounts
RM
FL
WIP
MO
FG
COGS
Six new accounts must be added to the
diagram for recording the variances.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
6
Purchase of Raw Materials
RM
AxS
FL
Standard costs are introduced
into the accounting system
when goods are acquired.
The actual quantity acquired
is recorded at the standard
price.
WIP
MO
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
FG
COGS
7
Materials Price Variance
MPV
u
f
FL
Standard costs are introduced
into the accounting system
when goods are acquired.
The actual quantity acquired
is recorded at the standard
price.
RM
AxS
WIP
MO
FG
COGS
The difference between the price paid
and the price that should have been paid
is the Materials Price Variance.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
8
Journal
Raw Materials (7,200 A
x $12 S)
Materials Price Variance
Accts Payable (7,200 A x $11.50 A)
86,400
3,600
82,800
Raw 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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
9
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
10
Materials Requisitioned
MPV
u
f
FL
RM
AxS
AxS
WIP
SxS
Actual direct materials used are
credited to RM while WIP is debited
with the standard amount which
should have been used.
MO
FG
COGS
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
11
Materials Quantity Variance
MPV
u
f
FL
MQV
u
f
RM
AxS
AxS
WIP
SxS
Actual direct materials used are
credited to RM while WIP is debited
with the standard amount which
should have been used.
MO
The difference between the standard
quantity that should have been used
and the actual quantity used is the
Materials Quantity Variance.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
FG
COGS
12
Journal
Raw Materials (7,200 A
x $12 S)
86,400
Materials Price Variance
3,600
Accts Payable (7,200 A x $11.50 A)
Work in Process (7,000 S
82,800
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
13
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
14
Factory Labor Incurred
MPV
u
f
FL
AxS
MQV
u
f
RM
AxS
AxS
WIP
SxS
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.
MO
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
FG
COGS
15
Labor Price Variance
MPV
u
f
FL
LPV
u
f
AxS
MQV
u
f
RM
AxS
AxS
WIP
SxS
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.
MO
FG
COGS
The difference between the actual price paid and
the standard rate which should have been paid is
the Labor Price Variance.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
16
Journal
Factory Labor (1,850 A
x $15 S)
Labor Price Variance
Wages Payable (1,850 A x $15.50 A)
27,750
925
28,675
Employees 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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
17
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
18
Factory Labor Assigned
MPV
u
f
FL
LPV
u
f
AxS
AxS
Standard hours are used to
assign Factory Labor costs to
production yet Factory Labor
is credited for actual hours
employees worked.
MQV
u
f
RM
AxS
AxS
WIP
SxS
SxS
MO
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
FG
COGS
19
Labor Quantity Variance
MPV
u
f
MQV
u
f
FL
LPV
u
f
AxS
AxS
LQV
u
Standard hours are used to
assign Factory Labor costs to
production yet Factory Labor is
credited for actual hours
employees worked.
f
MO
RM
AxS
AxS
WIP
SxS
SxS
FG
COGS
The Labor Quantity Variance is the difference
between the actual hours worked and the standard
hours which should have been worked.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
20
Journal
Factory Labor (1,850 A
x $15 S)
Labor Price Variance
27,750
925
Wages Payable (1,850 A x $15.50 A)
Work in Process (2,000 S
x $15 S)
28,675
30,000
Labor Quantity Variance
Factory Labor (1,850 A
x $15 S)
2,250
27,750
This entry is based on the calculations made previously.
The LQV is credited
to indicate it is favorable.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
21
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
22
Actual Overhead
MPV
u
f
MQV
u
f
FL
LPV
u
f
AxS
AxS
As demonstrated in job order
and process systems,
Manufacturing Overhead is
debited with actual costs
incurred.
LQV
u
f
MO
RM
AxS
AxS
WIP
SxS
SxS
FG
actual
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
COGS
23
Journal
Manufacturing Overhead
Accts Payable (etc.)
48,000
48,000
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
24
Application of Overhead
MPV
u
f
MQV
u
f
FL
LPV
u
f
AxS
AxS
As demonstrated in job order
and process systems,
Manufacturing Overhead is
debited with actual costs
incurred.
LQV
u
f
AxS
AxS
WIP
SxS
SxS
SxS
FG
MO
actual
RM
std
COGS
Overhead costs are applied to production based on
the standard hours which should have been
worked in producing the product.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
25
Journal
Manufacturing Overhead
48,000
Accts Payable (etc.)
48,000
Work in Process
42,400
Manufacturing Overhead
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
42,400
26
Overhead Variances
MPV
u
f
MQV
u
f
FL
LPV
u
f
AxS
AxS
OCV
u
f
OVV
u
f
LQV
u
f
AxS
AxS
WIP
SxS
SxS
SxS
FG
MO
actual
f
RM
std
u
COGS
Once calculated, the overhead controllable and
volume variances are reflected in the accounts.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
27
Journal
Manufacturing Overhead
48,000
Accts Payable (etc.)
Work in Process
48,000
42,400
Manufacturing Overhead
42,400
Overhead Controllable Var
1,600
Overhead Volume Variance
4,000
Manufacturing Overhead
Both controllable
and
volume
variances
© Copyright
2002, 2010
by M. Ray Gregg.
All rights reserved. were unfavorable.
5,600
28
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
29
Standards in the Accounts
MPV
u
f
MQV
u
f
FL
LPV
u
f
AxS
AxS
OCV
u
f
OVV
u
f
LQV
u
f
AxS
AxS
WIP
SxS
SxS
SxS
FG
MO
actual
f
RM
std
u
COGS
The “elements of cost” were debited to WIP at
standard amounts.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
30
Finished Goods
MPV
u
f
LPV
u
f
AxS
OCV
u
f
OVV
u
f
AxS
MQV
u
f
FL
AxS
RM
LQV
u
f
WIP
SxS
SxS
SxS
std
FG
MO
actual
f
AxS
std
u
std
COGS
Finished Goods are also recorded at standard
amounts.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
31
Journal
Finished Goods
Work in Process
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
std
std
32
Standards in the Accounts
MPV
u
f
LPV
u
f
AxS
OCV
u
f
OVV
u
f
AxS
MQV
u
f
FL
AxS
RM
LQV
u
f
WIP
SxS
SxS
SxS
std
FG
MO
actual
f
AxS
std
u
std
std
COGS
std
Standard amounts continue to be used to
record the flow of costs through the remaining
accounts.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
33
Journal
Finished Goods
std
Work in Process
Accounts Receivable
Sales
std
retail
retail
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
34
Journal
Finished Goods
std
Work in Process
Accounts Receivable
std
retail
Sales
retail
Cost of Goods Sold
Finished Goods
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
std
std
35
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:
rgregg@oru.edu
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved.
36
