Material Variances :: Accounting (Recording) Journal Entries

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 Price variance Transactions relating to price variance and recording them would be the same as when 5 ledger accounts are used. 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. Cost variance Transactions relating to cost variance and recording them would be the same as when 5 ledger accounts are used. When the Variance is Adverse Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) 01. – FGLC a/c MUV a/c       To WIP a/c Dr Dr – – – xxx xxx xxx [For the value of goods produced and the adverse usage/quantity variance thereon identified and recorded after completion of production.] 02. – WIPC a/c FGLC a/c COS a/c         To MUV a/c Dr Dr Dr – – – – xxx xxx xxx xxx [For the transfer/adjustment of normal part of the adverse usage variance to the relevant accounts.] 03. – MCV a/c    To MUV a/c Dr – – xxx xxx [For the transfer of abnormal part of the unfavorable usage variance to the "MCV a/c".] When the Variance is Favourable/Favorable Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) 01. – FGLC a/c     To WIP a/c     To MUV a/c Dr – – – xxx xxx xxx [For the value of goods produced and the favourable usage variance thereon identified and recorded at the time of completion of production.] 02. – MUV a/c     To WIP a/c     To FGLC a/c     To COS a/c Dr – – – – xxx xxx xxx xxx [For the transfer/adjustment of normal part of the favorable usage variance to the relevant accounts.] 03. – MUV a/c    To MCV a/c Dr – – xxx xxx [For the transfer of abnormal part of the favourable usage variance to the Material Cost Variance account.]

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 not be possible without errors in such a case. The transactions that would be relevant while using this account would be Recording the total Cost Variance Transferring Normal part of the Variance to the relevant accounts. Transferring Abnormal part of the Variance to the Costing Profit & Loss account. When the Variance is Adverse Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) 01. – FGLC a/c MCV a/c       To WIP a/c Dr Dr – – – xxx xxx xxx [For the value of goods produced and the adverse cost variance thereon identified and recorded at the time of completion of production.] 02. – WIPC a/c FGLC a/c COS a/c         To MCV a/c Dr Dr Dr – – – – xxx xxx xxx xxx [For the transfer/adjustment of normal part of the adverse cost variance to the relevant accounts.] 03. – CP&L a/c    To MCV a/c Dr – – xxx xxx [For the transfer of abnormal part of the unfavorable cost variance to the Costing P&L a/c.] When the Variance is Favourable/Favorable Journal in the books of M/s __ for the period from ____ to _____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) 01. – FGLC a/c     To WIP a/c     To MCV a/c Dr – – – xxx xxx xxx [For the value of goods produced and the favourable cost variance thereon identified and recorded at the time of completion of production.] 02. – MCV a/c     To WIP a/c     To FGLC a/c     To COS a/c Dr – – – – xxx xxx xxx xxx [For the transfer/adjustment of normal part of the favorable cost variance to the relevant accounts.] 03. – MCV a/c    To CP&L a/c Dr – – xxx xxx [For the transfer of abnormal part of the favourable cost variance to the Costing P & L a/c.]

Author Credit : The Edifier