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General Accounting Discussions: Standard Costing

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    • CommentAuthorilovesiomai
    • CommentTimeAug 8th 2007 edited
     
    Hi!

    I am new to standard costing. Kindly help me on this one.

    The following is the entry upon Production

    Debit FG - Inventory (using Std cost) 100
    Credit COGM – Std Cost 100

    However, at the end of the period, it was noted that the actual cost for manufacturing is higher by 10 than the standard cost. Thus the entry would be as follows:

    Debit COGM – Std Cost 100
    Debit Variance 10
    Credit Variable & Fixed Cost 110

    Now, my question is, do I need to adjust the value of the FG – Inventory? Considering that the actual cost is now higher? If yes, what would the entries be?

    Thanks!
    • CommentAuthorCounter
    • CommentTimeAug 13th 2007
     
    It depends on the cause of the variance.
    If the variance is due to negligence, the variance should go to expense. An asset's cost is all cost NECESSARY to get the asset in place and ready for use. Waste and negligence are never assets.
    If the variance is caused by unrealistic standards and the variance was a necessary cost, you should assign/prorate the variance to wherever the standard costs are resting. Some of the standard cost might be resting in finished goods inventory and some might be in the cost of goods sold. (Direct material variances might be in Raw Material Inventory, Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.)

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