In standard costing, how is the purchase price variance reclassified to arrive at actual cost?
I assume that the purchase price variance was recorded at the time that the raw materials were purchased. If that price variance is significant, it should be reclassified to the following: raw materials inventory, work-in-process inventory, finished goods inventory, and cost of goods sold. The reclassification is also known as prorating the variance or allocating the variance.
The reclassification of the purchase price variance should be based on the location of the raw materials which had created the price variance. If those raw materials were recently purchased and are entirely in the raw materials inventory, then all of the price variance should be assigned to the raw materials inventory. If the price variance occurred throughout the year, the variance should be assigned to the raw materials inventory, work-in-process inventory, finished goods inventory, and cost of goods sold based on the quantity of the raw materials in each of these categories.
If the amount of the purchase price variance is very small and/or the inventory turnover rates are very high, the entire amount of the price variance might be reclassified entirely to the cost of goods sold.