Budgeting and Variances Uses of budgets Production variances.
Standard Costs Recording Variances in the Accounts.
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Transcript of 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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 3
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. 4
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. 5
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 6
Standards in the AccountsRM
WIP
FG
COGS
FL
MO
Six new accounts must be added to the diagram for recording the variances.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 7
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 8
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 9
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 10
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 11
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 12
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 13
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 14
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 15
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 16
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 17
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 18
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 19
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 20
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 21
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 22
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 23
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 24
JournalManufacturing Overhead 48,000
Accts Payable (etc.) 48,000
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 25
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.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 26
JournalManufacturing Overhead 48,000
Accts Payable (etc.) 48,000
Work in Process 42,400
Manufacturing Overhead 42,400
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 27
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 28
JournalManufacturing Overhead 48,000
Accts Payable (etc.) 48,000
Work in Process 42,400
Manufacturing Overhead 42,400
Overhead Controllable Var 1,600
Overhead Volume Variance 4,000
Manufacturing Overhead 5,600
Both controllable and volume variances were unfavorable.
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 29
Lecture Calculation
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 30
Standards in the AccountsRM
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 31
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 32
JournalFinished Goods std
Work in Process std
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 33
Standards in the AccountsRM
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
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 34
JournalFinished Goods std
Work in Process std
Accounts Receivable retail
Sales retail
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 35
JournalFinished Goods std
Work in Process std
Accounts Receivable retail
Sales retail
Cost of Goods Sold std
Finished Goods std
© Copyright 2002, 2010 by M. Ray Gregg. All rights reserved. 36
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: