CIMA BA2 Syllabus C. PLANNING AND CONTROL - Cost Book Keeping Variances - Notes ^{3 / 3}

Price / Rate Variances

With the raw materials account, we debit the actual cost that comes in, but we use standard costing to credit it out of the account. 

Therefore, if the actual cost of materials is $100, we debit that into raw materials, but if the standard cost of the materials is $80, then double entry will look like this:

When we purchase

Debit raw materials $100
Credit cash $100

When we transfer to WIP

Debit WIP $80 (the standard cost)
Credit raw materials $80

This shows a $20 Adverse rate variance

This variance will go to the Variance T account

Therefore, to balance off, the third entry will be:

Debit Materials price variance $20
Credit RM $20

The same application will be used if there is a labour rate variance.

Use / Efficiency Variances

With the WIP account, when goods are finished, we credit them out of the WIP account and debit the FG account. 

Let us assume that we have a debit entry of $80 in the WIP account, but transferred to FG is only $60, this shows an adverse materials usage variance. 

The entries will look like this

Debit FG $60
Debit Variance account - usage variance $20 
Credit WIP $80

The same application will be used if there is a labour efficiency variance.

If there are favourable variances, then we will be crediting the variance accounts

Illustration - Price / Rate Variance

Product A has the following standard material cost:

1 metre costs $10 = $ 10

Actually while producing product A, 10 metres were purchased for $130 (10 metres should cost $100 using the std)

What will the double entries be?

Solution

On purchase

Debit Raw materials $130
Credit cash $130

When materials are being used in the production of Product A

Debit WIP $100
Debit Variance (Materials price V) $30 - This would then go to the income statement as an expense
Credit RM $130