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Standard Costs Chapter Ten © 2006 McGraw-Hill Ryerson Ltd. Learning Objectives After studying this chapter, you should be able to: 1. Explain how direct materials standards and direct labour standards are set. 2. Compute the direct materials price and quantity variances and explain their significance. 3. Compute mix and yield variances for materials and explain their significance. © 2006 McGraw-Hill Ryerson Ltd. Learning Objectives After studying this chapter, you should be able to: 4. Compute the direct labour rate and efficiency variances and explain their significance. 5. Compute the variable manufacturing overhead spending and efficiency variances. 6. (Appendix 10A) Prepare journal entries to record standard costs and variances. © 2006 McGraw-Hill Ryerson Ltd. Standard Costs Standards are benchmarks or “norms” for measuring performance. Two types of standards are commonly used. Quantity standards specify how much of an input should be used to make a product or provide a service. © 2006 McGraw-Hill Ryerson Ltd. Cost (price) standards specify how much should be paid for each unit of the input. Standard Costs Amount Deviations from standard deemed significant are brought to the attention of management, a practice known as management by exception. Standard Direct Labour Direct Material Manufacturing Overhead Type of Product Cost © 2006 McGraw-Hill Ryerson Ltd. Variance Analysis Cycle Identify questions Receive explanations Conduct next period’s operations Analyze variances Prepare standard cost performance report © 2006 McGraw-Hill Ryerson Ltd. Take corrective actions Begin Exh. 10-1 Setting Standard Costs Accountants, engineers, purchasing agents, and production managers combine efforts to set standards that encourage efficient future production. © 2006 McGraw-Hill Ryerson Ltd. Setting Standard Costs Should we use ideal standards that require employees to work at 100 percent peak efficiency? Engineer © 2006 McGraw-Hill Ryerson Ltd. I recommend using practical standards that are currently attainable with reasonable and efficient effort. Managerial Accountant Setting Direct Material Standards Price Standards Quantity Standards Final, delivered cost of materials, net of discounts. Summarized in a Bill of Materials. © 2006 McGraw-Hill Ryerson Ltd. Setting Standards In recent years, TQM advocates have sought to eliminate all defects and waste, rather than continually build them into standards. As a result allowances for waste and spoilage that are built into standards should be reduced over time. © 2006 McGraw-Hill Ryerson Ltd. Setting Direct Labour Standards Rate Standards Time Standards Often a single rate is used that reflects the mix of wages earned. Use time and motion studies for each labour operation. © 2006 McGraw-Hill Ryerson Ltd. Setting Variable Overhead Standards Rate Standards Activity Standards The rate is the variable portion of the predetermined overhead rate. The activity is the base used to calculate the predetermined overhead. © 2006 McGraw-Hill Ryerson Ltd. Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this: Inputs Direct materials Direct labour Variable mfg. overhead Total standard unit cost © 2006 McGraw-Hill Ryerson Ltd. A B AxB Standard Quantity or Hours Standard Price or Rate Standard Cost per Unit 3.0 lbs. 2.5 hours 2.5 hours $ 4.00 per lb. $ 14.00 per hour 3.00 per hour $ 12.00 35.00 7.50 54.50 Standards vs. Budgets Are standards the same as budgets? A budget is set for total costs. © 2006 McGraw-Hill Ryerson Ltd. A standard is a per unit cost. Standards are often used when preparing budgets. Price and Quantity Standards Price and and quantity standards are determined separately for two reasons: The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used. The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production. © 2006 McGraw-Hill Ryerson Ltd. A General Model for Variance Analysis Variance Analysis Price Variance Quantity Variance Difference between actual price and standard price Difference between actual quantity and standard quantity © 2006 McGraw-Hill Ryerson Ltd. A General Model for Variance Analysis Variance Analysis Price Variance Quantity Variance Materials price variance Labour rate variance VOH spending variance Materials quantity variance Labour efficiency variance VOH efficiency variance © 2006 McGraw-Hill Ryerson Ltd. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance © 2006 McGraw-Hill Ryerson Ltd. Standard Quantity × Standard Price Quantity Variance A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Actual quantity is the amount of direct materials, direct labour, and variable manufacturing overhead actually used. © 2006 McGraw-Hill Ryerson Ltd. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Standard quantity is the standard quantity allowed for the actual output for the period. © 2006 McGraw-Hill Ryerson Ltd. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Actual price is the amount actually paid for the for the input used. © 2006 McGraw-Hill Ryerson Ltd. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance Standard price is the amount that should have been paid for the input used. © 2006 McGraw-Hill Ryerson Ltd. A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance (AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP) AQ = Actual Quantity AP = Actual Price SP = Standard Price SQ = Standard Quantity © 2006 McGraw-Hill Ryerson Ltd. Material Variances Example Glacier Peak Outfitters has the following direct material standard for the fiberfill in its mountain parka. 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029. © 2006 McGraw-Hill Ryerson Ltd. Material Variances Summary Actual Quantity × Actual Price Actual Quantity × Standard Price 210 kgs. × $4.90 per kg. 210 kgs. × $5.00 per kg. = $1,029 Price variance $21 favorable © 2006 McGraw-Hill Ryerson Ltd. = $1,050 Standard Quantity × Standard Price 200 kgs. × $5.00 per kg. = $1,000 Quantity variance $50 unfavorable Material Variances Summary Actual Quantity × Actual Price 210 kgs. × $4.90 per kg. Actual Quantity × Standard Price 210 kgs. $1,029 × 210 kgs $5.00per perkg kg. = $4.90 = $1,029 Price variance $21 favorable © 2006 McGraw-Hill Ryerson Ltd. = $1,050 Standard Quantity × Standard Price 200 kgs. × $5.00 per kg. = $1,000 Quantity variance $50 unfavorable Material Variances Summary Actual Quantity × Actual Price Actual Quantity × Standard Price Standard Quantity × Standard Price 210 kgs. 210 kgs. 200 kgs. × × 0.1 kg per parka× 2,000 parkas $4.90 per kg. $5.00 $5.00 per kg. = 200 per kgs kg. = $1,029 Price variance $21 favorable © 2006 McGraw-Hill Ryerson Ltd. = $1,050 = $1,000 Quantity variance $50 unfavorable Material Variances: Using the Factored Equations Materials price variance MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F Materials quantity variance MQV = SP (AQ - SQ) = $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas)) = $5.00/kg (210 kgs - 200 kgs) = $5.00/kg (10 kgs) = $50 U © 2006 McGraw-Hill Ryerson Ltd. Responsibility for Material Variances Materials Quantity Variance Production Manager Materials Price Variance Purchasing Manager The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing manager’s performance. © 2006 McGraw-Hill Ryerson Ltd. Responsibility for Material Variances I am not responsible for this unfavorable material quantity variance. You purchased cheap material, so my people had to use more of it. © 2006 McGraw-Hill Ryerson Ltd. Your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances. Quick Check Zippy Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The material cost a total of $6,630. © 2006 McGraw-Hill Ryerson Ltd. Quick Check Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. © 2006 McGraw-Hill Ryerson Ltd. Zippy Quick Check Zippy Hanson’s material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. MPV = AQ(AP - SP) d. $800 favorable.MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable © 2006 McGraw-Hill Ryerson Ltd. Quick Check Zippy Hanson’s material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. © 2006 McGraw-Hill Ryerson Ltd. Quick Check Zippy Hanson’s material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable. MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Quick Check Actual Quantity × Actual Price Actual Quantity × Standard Price Zippy Standard Quantity × Standard Price 1,700 lbs. × $3.90 per lb. 1,700 lbs. × $4.00 per lb. 1,500 lbs. × $4.00 per lb. = $6,630 = $ 6,800 = $6,000 Price variance $170 favorable © 2006 McGraw-Hill Ryerson Ltd. Quantity variance $800 unfavorable Isolation of Material Variances I need the price variance sooner so that I can better identify purchasing problems. You accountants just don’t understand the problems that purchasing managers have. © 2006 McGraw-Hill Ryerson Ltd. I’ll start computing the price variance when material is purchased rather than when it’s used. Material Variances Hanson purchased and used 1,700 pounds. How are the variances computed if the amount purchased differs from the amount used? © 2006 McGraw-Hill Ryerson Ltd. The price variance is computed on the entire quantity purchased. The quantity variance is computed only on the quantity used. Quick Check Continued Zippy Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies. © 2006 McGraw-Hill Ryerson Ltd. Quick Check Continued Actual Quantity Purchased × Actual Price Actual Quantity Purchased × Standard Price 2,800 lbs. × $3.90 per lb. 2,800 lbs. × $4.00 per lb. = $10,920 = $11,200 Price variance $280 favorable © 2006 McGraw-Hill Ryerson Ltd. Zippy Price variance increases because quantity purchased increases. Quick Check Continued Actual Quantity Used × Standard Price Standard Quantity × Standard Price 1,700 lbs. × $4.00 per lb. 1,500 lbs. × $4.00 per lb. = $6,800 = $6,000 Quantity variance is unchanged because actual and standard quantities are unchanged. © 2006 McGraw-Hill Ryerson Ltd. Zippy Quantity variance $800 unfavorable Further Analysis of Materials Variances: Mix and Yield When the production process requires the input of more than one material, the material quantity variance (MQV) can be further broken down into mix variance and yield variance. © 2006 McGraw-Hill Ryerson Ltd. Mix and Yield Variances Actual Quantity × Standard Price Actual Quantity @ Std. Mix (M) × Standard Price Mix Variance Standard Quantity × Standard Price Yield Variance Material Quantity Variance SP(AQ - M) AQ = Actual Quantity SP = Standard Price © 2006 McGraw-Hill Ryerson Ltd. SP(M - SQ) M = AQ @ Std. Mix SQ = Standard Quantity Example of Mix and Yield Variances • One unit of finished goods requires the following input mix: 2 kgs of A with a standard price of $1.50/kg 3 kgs of B with a standard price of $2.50/kg • The standard mix is thus 2A:3B • During the period, 150 units of finished goods were produced using 350 kgs of A and 450 kgs of B. © 2006 McGraw-Hill Ryerson Ltd. 35 2 5 Mix and Yield Variances • Mix Variance: SP(AQ - M) Material A: $1.50 x [350 – 2/5 (350 + 450)] = $45 U Material B: $2.50 x [450 – 3/5 (350 + 450)] = $75 F • Yield Variance: SP(M - SQ) Material A: $1.50 x [2/5 (350 + 450) – 150(2)] = $30 U Material B: $2.50 x [3/5 (350 + 450) – 150 (3)] = $75 U • Material Quantity Variance: SP(AQ - SQ) Material A: $1.50 x [350 – 150(2)] = $75 U Material B: $2.50 x [450 – 150 (3)] = $-0- U © 2006 McGraw-Hill Ryerson Ltd. Material Mix and Yield Variances 80 60 40 20 Mix Yield Quantity 0 -20 -40 -60 -80 A © 2006 McGraw-Hill Ryerson Ltd. B Labour Variances Example Glacier Peak Outfitters has the following direct labour standard for its mountain parka. 1.2 standard hours per parka at $10.00 per hour Last month employees actually worked 2,500 hours at a total labour cost of $26,250 to make 2,000 parkas. © 2006 McGraw-Hill Ryerson Ltd. Labour Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate 2,500 hours × $10.50 per hour 2,500 hours × $10.00 per hour. = $26,250 = $25,000 Rate variance $1,250 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Standard Hours × Standard Rate 2,400 hours × $10.00 per hour = $24,000 Efficiency variance $1,000 unfavorable Labour Variances Summary Actual Hours × Actual Rate 2,500 hours × $10.50 per hour = $26,250 Actual Hours × Standard Rate 2,500 hours 2,400 hours × 2,500 hours × $26,250 $10.00 per hour. = $10.50 per hour $10.00 per hour = $25,000 Rate variance $1,250 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Standard Hours × Standard Rate = $24,000 Efficiency variance $1,000 unfavorable Labour Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate Standard Hours × Standard Rate 2,500 hours 2,500 hours 2,400 hours × × 1.2 hours per ×parka 2,000 $10.50 per hour parkas $10.00 per hour. $10.00 per hour = 2,400 hours = $26,250 = $25,000 Rate variance $1,250 unfavorable © 2006 McGraw-Hill Ryerson Ltd. = $24,000 Efficiency variance $1,000 unfavorable Labour Variances: Using the Factored Equations Labour rate variance LRV = AH (AR - SR) = 2,500 hours ($10.50 per hour – $10.00 per hour) = 2,500 hours ($0.50 per hour) = $1,250 unfavorable Labour efficiency variance LEV = SR (AH - SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Responsibility for Labour Variances Production managers are usually held accountable for labour variances because they can influence the: Mix of skill levels assigned to work tasks. Level of employee motivation. Quality of production supervision. Production Manager © 2006 McGraw-Hill Ryerson Ltd. Quality of training provided to employees. Responsibility for Labour Variances I am not responsible for the unfavorable labour efficiency variance! You purchased cheap material, so it took more time to process it. © 2006 McGraw-Hill Ryerson Ltd. I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment. Quick Check Zippy Hanson Inc. has the following direct labour standard to manufacture one Zippy: 1.5 standard hours per Zippy at $12.00 per direct labour hour Last week 1,550 direct labour hours were worked at a total labour cost of $18,910 to make 1,000 Zippies. © 2006 McGraw-Hill Ryerson Ltd. Quick Check Hanson’s labour rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable. © 2006 McGraw-Hill Ryerson Ltd. Zippy Quick Check Zippy Hanson’s labour rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. LRV = AH(AR - SR) c. $300 unfavorable. LRV = 1,550 hrs($12.20 - $12.00) d. $300 favorable. LRV = $310 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Quick Check Zippy Hanson’s labour efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. © 2006 McGraw-Hill Ryerson Ltd. Quick Check Zippy Hanson’s labour efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Quick Check Actual Hours × Actual Rate Actual Hours × Standard Rate 1,550 hours × $12.20 per hour 1,550 hours × $12.00 per hour = $18,910 = $18,600 Rate variance $310 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Zippy Standard Hours × Standard Rate 1,500 hours × $12.00 per hour = $18,000 Efficiency variance $600 unfavorable Variable Manufacturing Overhead Variances Example Glacier Peak Outfitters has the following variable manufacturing overhead standard for its mountain parka. 1.2 standard hours per parka at $4.00 per hour Last month employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for the month was $10,500. © 2006 McGraw-Hill Ryerson Ltd. Variable Manufacturing Overhead Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate Standard Hours × Standard Rate 2,500 hours × $4.20 per hour 2,500 hours × $4.00 per hour 2,400 hours × $4.00 per hour = $10,500 = $10,000 = $9,600 Spending variance $500 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Efficiency variance $400 unfavorable Variable Manufacturing Overhead Variances Summary Actual Hours × Actual Rate 2,500 hours × $4.20 per hour = $10,500 Actual Hours × Standard Rate 2,500 hours 2,400 hours × $10,500× 2,500 hours $4.00 per per hourhour $4.00 per hour = $4.20 = $10,000 Spending variance $500 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Standard Hours × Standard Rate = $9,600 Efficiency variance $400 unfavorable Variable Manufacturing Overhead Variances Summary Actual Hours × Actual Rate Actual Hours × Standard Rate 2,500 hours 2,500 hours × 1.2 hours per ×parka 2,000 $4.20 per hour parkas $4.00 per hour = 2,400 hours = $10,500 = $10,000 Spending variance $500 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Standard Hours × Standard Rate 2,400 hours × $4.00 per hour = $9,600 Efficiency variance $400 unfavorable Variable Manufacturing Overhead Variances: Using Factored Equations Variable manufacturing overhead spending variance VMSV = AH (AR - SR) = 2,500 hours ($4.20 per hour – $4.00 per hour) = 2,500 hours ($0.20 per hour) = $500 unfavorable Variable manufacturing overhead efficiency variance VMEV = SR (AH - SH) = $4.00 per hour (2,500 hours – 2,400 hours) = $4.00 per hour (100 hours) = $400 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Quick Check Zippy Hanson Inc. has the following variable manufacturing overhead standard to manufacture one Zippy: 1.5 standard hours per Zippy at $3.00 per direct labour hour Last week 1,550 hours were worked to make 1,000 Zippies, and $5,115 was spent for variable manufacturing overhead. © 2006 McGraw-Hill Ryerson Ltd. Quick Check Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable. © 2006 McGraw-Hill Ryerson Ltd. Zippy Quick Check Zippy Hanson’s spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. VOSV = AH(AR - SR) c. $335 unfavorable. VOSV = 1,550 hrs($3.30 - $3.00) d. $300 favorable. VOSV = $465 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Quick Check Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable. © 2006 McGraw-Hill Ryerson Ltd. Zippy Quick Check Zippy Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. 1,000 units × 1.5 hrs per unit c. $150 unfavorable. d. $150 favorable. VOEV = SR(AH - SH) VOEV = $3.00(1,550 hrs - 1,500 hrs) VOEV = $150 unfavorable © 2006 McGraw-Hill Ryerson Ltd. Quick Check Zippy Actual Hours × Actual Rate Actual Hours × Standard Rate Standard Hours × Standard Rate 1,550 hours × $3.30 per hour 1,550 hours × $3.00 per hour 1,500 hours × $3.00 per hour = $5,115 = $4,650 Spending variance $465 unfavorable © 2006 McGraw-Hill Ryerson Ltd. = $4,500 Efficiency variance $150 unfavorable Variance Analysis and Management by Exception How do I know which variances to investigate? © 2006 McGraw-Hill Ryerson Ltd. Larger variances, in dollar amount or as a percentage of the standard, are investigated first. Exh. 10-9 A Statistical Control Chart Warning signals for investigation Favorable Limit • Desired Value • • • • • • Unfavorable Limit 1 2 3 4 5 6 7 Variance Measurements © 2006 McGraw-Hill Ryerson Ltd. • 8 • 9 Advantages of Standard Costs Promotes economy and efficiency Management by exception Advantages Simplified bookkeeping © 2006 McGraw-Hill Ryerson Ltd. Enhances responsibility accounting Potential Problems with Standard Costs Emphasizing standards may exclude other important objectives. Standard cost reports may not be timely. Invalid assumptions about the relationship between labour cost and output. © 2006 McGraw-Hill Ryerson Ltd. Potential Problems Favorable variances may be misinterpreted. Emphasis on negative may impact morale. Continuous improvement may be more important than meeting standards. Review Problem Standard Costs © 2006 McGraw-Hill Ryerson Ltd. Review Problem Xavier Company produces a single product. Variable manufacturing overhead is applied to products on the basis of direct labour-hours. The standard costs for one unit of product are as follows: Direct material: 6 grams at $0.50 per gram Direct labour: 1.8 hours at $10 per hour Variable manufacturing overhead: 1.8 hours at $5 per hour Total standard variable cost per unit © 2006 McGraw-Hill Ryerson Ltd. $ 3 18 9 $30 Review Problem During June, 2,000 units were produced. The costs associated with June’s operations were as follows: Materials purchased: 18,000 grams at $0.60 $10,800 Materials used in production: 14,000 grams — Direct labour: 4,000 hours at $9.75 per hour 39,000 Variable manufacturing overhead costs incurred 20,800 Compute the materials, labour, and variable manufacturing overhead variances. © 2006 McGraw-Hill Ryerson Ltd. Appendix 10A Journal Entries to Record Variances We will use information form the Glacier Peak Outfitters example earlier in the chapter to illustrate journal entries for standard cost variances. Recall the following: Material AQ × AP = $1,029 AQ × SP = $1,050 SQ × SP = $1,000 MPV = $21 F MQV = $50 U Labour AH × AR = $26,250 AH × SR = $25,000 SH × SR = $24,000 LRV = $1,250 U LEV = $1,000 U Now let’s prepare the entries to record the labour and material variances. © 2006 McGraw-Hill Ryerson Ltd. Appendix 10A Journal Entries to Record Variances GENERAL JOURNAL Date Description Raw Materials Post. Ref. Page 4 Debit Credit 1,050 Materials Price Variance 21 Accounts Payable 1,029 To record the purchase of material Work in Process Materials Quantity Variance Raw materials To record the use of material © 2006 McGraw-Hill Ryerson Ltd. 1,000 50 1,050 Appendix 10A Journal Entries to Record Variances GENERAL JOURNAL Date Description Work in Process Post. Ref. Page 4 Debit 24,000 Labour Rate Variance 1,250 Labour Efficiency variance 1,000 Wages Payable Credit 26,250 To record direct labour Variable manufacturing overhead variances are usually not recorded in the accounts separately, but are determined as part of the general analysis of overhead that is covered in the next chapter. © 2006 McGraw-Hill Ryerson Ltd. Cost Flows in a Standard Cost System • Inventories are recorded at standard cost. • Variances are recorded as follows: Favorable variances are credits, representing savings in production costs. Unfavorable variances are debits, representing excess production costs. • Standard cost variances are usually closed to cost of goods sold. Favorable variances decrease cost of goods sold. Unfavorable variances increase cost of goods sold. © 2006 McGraw-Hill Ryerson Ltd. End of Chapter 10 © 2006 McGraw-Hill Ryerson Ltd.
