Material Variances - Accounting - Recording Journal Entries

Page M16

Using 5 Ledger Accounts

This the most detailed methodology for recording the material variances. All the variances are recorded in this method.

Ledger Accounts Used

The ledger accounts used for recording the transactions are
  • Material Price Variance (MPV) a/c
  • Material Mix Variance (MMV) a/c
  • Material Yield Variance (MYV) a/c
  • Material Usage/Quantity Variance (MUV/MQV) a/c
  • Material Cost Variance (MCV) a/c

Price Variance

Assuming that the standard pricing of stocks is being followed, the price variance is identified and recorded at the point of purchase itself.

The transactions with regard to accounting for material price variance would be.

  1. Recording Material Price Variance.
  2. Transferring Normal part of the variance to relevant accounts.
  3. Transferring abnormal part of the variance to MCV a/c.

When the Variance is Adverse

Journal
Particulars
SLC a/c
MPV a/c
To GLA a/c
Dr
Dr
[For the value of material purchased and the adverse price variance thereon identified and recorded at the time of purchase.]
Or
WIP a/c
FOH a/c
MPV a/c
To SLC a/c
Dr
Dr
Dr
[For the value of material issued as direct and indirect materials and the adverse price variance thereon identified and recorded at the time of issue of materials.]
SLC a/c
WIPC a/c
FGLC a/c
COS a/c
To MPV a/c
Dr
Dr
Dr
Dr
[For the transfer/adjustment of normal part of the adverse price variance to the relevant accounts.]
MCV a/c
To MPV a/c
Dr
[For the transfer of abnormal part of the unfavorable price variance to the Material Cost Variance account.]

When the Variance is Favourable/Favorable

Journal
Particulars
SLC a/c
To GLA a/c
To MPV a/c
Dr
[For the value of material purchased and the favourable price variance thereon identified and recorded at the time of purchase.]
Or
WIP a/c
To SLC a/c
To MPV a/c
Dr
[For the value of material issued as direct and indirect materials and the favorable price variance thereon identified and recorded at the time of issue of materials.]
MPV a/c
To SLC a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For the transfer/adjustment of normal part of the favorable price variance to the relevant accounts.]
MPV a/c
To MCV a/c
Dr
[For the transfer of abnormal part of the favourable price variance to the MCV a/c.]

Mix Variance

This may be identified and recorded at the time of issue of materials or along with the yield variance on completion of production.

When the Variance is Adverse

Journal
Particulars
WIP a/c
MMV a/c
To SLC a/c
Dr
Dr
[For the value of direct materials used and the adverse mix variance thereon identified and recorded at the time of issue of materials.]
FGLC a/c
MMV a/c
To WIP a/c
Dr
Dr
[For the value of goods produced and the adverse mix variance thereon identified and recorded at the time of completion of production.]
WIPC a/c
FGLC a/c
COS a/c
To MMV a/c
Dr
Dr
Dr
[For the transfer/adjustment of normal part of the adverse mix variance to the relevant accounts.]
MUV a/c
To MMV a/c
Dr
[For the transfer of abnormal part of the unfavorable mix variance to the Material Usage Variance account.]

When the Variance is Favourable/Favorable

Journal
Particulars
WIP a/c
To SLC a/c
To MMV a/c
Dr
[For the value of direct material used and the favourable mix variance thereon identified and recorded at the time of issue of materials.]
FGLC a/c
To WIP a/c
To MMV a/c
Dr
[For the value of goods produced and the favorable mix variance thereon identified and recorded at the time of completion of production.]
MMV a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For the transfer/adjustment of normal part of the favorable mix/yield variance to the relevant accounts.]
MMV a/c
To MUV a/c
Dr
[For the transfer of abnormal part of the favourable mix/yield variance to the Material Usage Variance account.]

Yield Variance

This is identified and recorded after the production is completed i.e. at the time of transfer of completed production to finished goods stock.

Except for the point at which the variance is recorded, the transactions relating to these two variances need similar entries for recording.

  1. Recording Mix Variance.
  2. Recording Yield Variance.
  3. Transferring normal part of the variances to the relevant accounts.
  4. Transferring abnormal part of the variances to MUV/MQV a/c.

When the Variance is Adverse

Journal
Particulars
FGLC a/c
MYV a/c
To WIP a/c
Dr
Dr
[For the value of goods produced and the adverse yield variance thereon identified and recorded at the time of completion of production.]
WIPC a/c
FGLC a/c
COS a/c
To MYV a/c
Dr
Dr
Dr
[For the transfer/adjustment of normal part of the adverse yield variance to the relevant accounts.]
MUV a/c
To MYV a/c
Dr
[For the transfer of abnormal part of the unfavorable yield variance to the Material Usage Variance account.]

When the Variance is Favourable/Favorable

Journal
Particulars
FGLC a/c
To WIP a/c
To MYV a/c
Dr
[For the value of goods produced and the favourable/favorable yield variance thereon identified and recorded at the time of completion of production.]
MYV a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For the transfer/adjustment of normal part of the favorable mix/yield variance to the relevant accounts.]
MYV a/c
To MUV a/c
Dr
[For the transfer of abnormal part of the favourable mix/yield variance to the Material Usage Variance account.]

Usage/Quantity Variance [a Consolidation Account]

The total variance in the Usage Variance account represents abnormal variance. This is to be transferred to the Cost Variance account.

There is only one transaction in such a case.

  1. Transferring Abnormal Variance to Cost Variance Account.

    When the Variance is Adverse

    Journal
    Particulars
    MCV a/c
    To MUV a/c
    		Dr
    [For the total adverse usage variance transferred to cost variance account.]

    When the Variance is favourable/favorable

    Journal
    Particulars
    MUV a/c
    To MCV a/c
    		Dr
    [For the total favourable/favorable usage variance transferred to cost variance account.]

Cost Variance [a Consolidation Account]

The total variance in the Cost Variance account represents abnormal variance. This is to be transferred to the Costing Profit and Loss account.

There is only one transaction in such a case.

  1. Transferring Abnormal Variance to Costing Profit and Loss Account.

    When the Variance is Adverse

    Journal
    Particulars
    C P&L a/c
    To MCV a/c
    		Dr
    [For the total adverse cost variance transferred to costing profit and loss account.]

    When the Variance is Favourable/Favorable

    Journal
    Particulars
    MCV a/c
    To C P&L a/c
    		Dr
    [For the total favourable/favorable cost variance transferred to costing profit and loss account.]

Using 3 Ledger Accounts

We come across two situations where we use only 3 ledger accounts for recording material variances
  • Where there is only one material in use all usage/quantity variance is nothing but yield variance. In such situations we assume the presence of only usage/quantity variance in place of mix and yield variances.
  • Where the organisation does not intend to segregate the usage/quantity variance into mix and yield variances, it can eliminate recording these transactions by calculating the Usage/Quantity Variance directly using a formula. In such a case, the Usage/Quantity variance a/c would not be a consolidation account.

The ledger accounts used are

  • Material Price Variance (MPV) a/c
  • Material Usage/Quantity Variance (MUV/MQV) a/c
  • Material Cost Variance (MCV) a/c

In such a case, the transactions would be

  1. Price variance

    Transactions relating to price variance and recording them would be the same as when 5 ledger accounts are used.

  2. Usage/Quantity Variance

    • Recording the Usage/Quantity variance.
    • Transferring Normal part of the Usage/Quantity Variance to the relevant accounts.
    • Transferring Abnormal part of the Usage/Quantity Variance to the Cost Variance account.

    When the Variance is Adverse

    Journal
    Particulars
    FGLC a/c
    MUV a/c
    To WIP a/c
    		Dr
    Dr
    [For the value of goods produced and the adverse usage/quantity variance thereon identified and recorded after completion of production.]
    WIPC a/c
    FGLC a/c
    COS a/c
    To MUV a/c
    		Dr
    Dr
    Dr
    [For the transfer/adjustment of normal part of the adverse usage variance to the relevant accounts.]
    MCV a/c
    To MUV a/c
    		Dr
    [For the transfer of abnormal part of the unfavorable usage variance to the MCV a/c.]

    When the Variance is Favourable/Favorable

    Journal
    Particulars
    FGLC a/c
    To WIP a/c
    To MUV a/c
    		Dr
    [For the value of goods produced and the favourable usage variance thereon identified and recorded at the time of completion of production.]
    MUV a/c
    To WIP a/c
    To FGLC a/c
    To COS a/c
    		Dr
    [For the transfer/adjustment of normal part of the favorable usage variance to the relevant accounts.]
    MUV a/c
    To MCV a/c
    		Dr
    [For the transfer of abnormal part of the favourable usage variance to the Material Cost Variance account.]

  3. Cost variance

    Transactions relating to cost variance and recording them would be the same as when 5 ledger accounts are used.

Using a Single Ledger Account

Though it is theoretically possible to find and therefore record the total variance using only the Material Cost Variance a/c, it does not sound prudent. Deciding the normal and abnormal part of the variance would be erroneous in such a case.

Cost Variance a/c would be a regular account instead of a consolidation account in such a case. The transactions that would be relevant while using this account would be

  1. Recording the total Cost Variance
  2. Transferring Normal part of the Variance to the relevant accounts.
  3. Transferring Abnormal part of the Variance to the Costing Profit & Loss account.

When the Variance is Adverse

Journal
Particulars
FGLC a/c
MCV a/c
To WIP a/c
Dr
Dr
[For the value of goods produced and the adverse cost variance thereon identified and recorded at the time of completion of production.]
WIPC a/c
FGLC a/c
COS a/c
To MCV a/c
Dr
Dr
Dr
[For transfer/adjustment of normal part of the adverse cost variance to relevant accounts.]
C P&L a/c
To MCV a/c
Dr
[For transfer of abnormal part of the unfavorable cost variance to Costing P&L a/c.]

When the Variance is Favourable/Favorable

Journal
Particulars
FGLC a/c
To WIP a/c
To MCV a/c
Dr
[For the value of goods produced and the favourable cost variance thereon identified and recorded at the time of completion of production.]
MCV a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For the transfer/adjustment of normal part of the favorable cost variance to the relevant accounts.]
MCV a/c
To C P&L a/c
Dr
[For the transfer of abnormal part of the favourable cost variance to the Costing P & L a/c.]
Author : The Edifier
Labor/Labour Variances