- The differences between standard and actual figures are called variances. These variances may be favourable of unfavourable. These are recorded into cost accounts. For this purpose, the following procedure is adopted:-
a) Variances are calculated at the time of occurrence or when he respective element of cost is charged to production.
b) Variances accounts are maintained for each type of variance.
c) Transfers between the work in progress, finished goods and cost of sales are made at standard figures.
d) Stock of raw materials, work in progress and finished goods are valued at standard cost.
e) Unfavourable price or expenditure variances are credited to the respective control account and debited to the respective variances account. For example, adverse labour rate variance is debited to labour rate variance account and credited to wages control account. Similarly, adverse material price variance is debited to material price variance account and credited to stores control account. Favourable price or expenditure variances are debited to respective control account and credited to respective variance account.
f) Unfavourable usage or efficiency variances are debited to respective variance account and credited to work in progress account. For example, adverse material usage variance of adverse labour efficiency variance is debited to material usage variance account or labour efficiency account and credited to W.I.P account. If the usage or efficiency variances are favourable then debit W.I.P account and credit respective variance account.
g) At the end of the year, the balances in the variance accounts are transferred to the profit and loss account. It means adverse variances are debited to the profit and loss account and favourable variances are credited to the profit and loss account.
Wilfykil answered the question on August 7, 2019 at 06:14
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Date posted: August 6, 2019. Answers (1)