Accounting control systems: recording variances in

integrated ledgers by Janet Payne

The Fundamentals of Management Accounting (BA2) syllabus requires

you to be able to “prepare a set of integrated accounts, showing

standard cost variances”. This third and last article in the series on

accounting control systems will look at how ledger accounts are

maintained in an integrated standard costing system.

To be able to understand the workings of an integrated standard cost

bookkeeping system, you first need to understand the meaning of

standard cost variances for materials, labour and variable overhead. You

account for the material price variance, an account for the material usage variance, and so

on.

An adverse variance is debited to the variance account and a favourable variance is credited

to the variance account. This is fairly straightforward but many students experience difficulty

in understanding where to record the ‘other side’ of the double entry for each variance.

Recording the occurrence of the variance

As a general rule, the ‘other side’ of the double entry for each variance is shown in the

account which records where the variance arose. For example:

is therefore recorded in the materials control account.

 The labour rate variance arises because the hourly rate paid for labour is different

from the standard rate. This occurs as wages are paid and the variance is therefore

recorded in the wages control account.

 The labour efficiency and variable production overhead efficiency variances arise

because the number of labour hours used during production are different from

standard. These variances are therefore recorded in the work in progress control

account.

 The variable production overhead expenditure variance arises because a different

hourly rate is paid for variable overhead than standard. This occurs as overheads are

production process and the variances are therefore recorded in the work in progress

control account. The labour and variable overhead efficiency variances are favourable

and are therefore credits in the variance accounts. The adverse material usage variance

is a debit in the variance account.

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to production.

An integrated standard cost accounting system will record these materials movements as

follows.

The adverse material price variance of $250 ($0.50 per kg x 500kg purchased) is recorded

as a debit in the variance account. The corresponding credit entry is in the materials control

account and the closing inventory of 160kg is valued at the standard price of $3 per kg.

The Statement of Profit or Loss (the Income Statement)

At the end of the period, the total of each of the variance accounts is transferred to the

Statement of Profit or Loss.

An adverse variance total will be debited to the Statement of Profit or Loss and a favourable

variance total will be credited. For example, if the material price variance in the example

above is the only price variance to arise during the period, the variance account will look like

offset against the standard production cost which will have been transferred from the

finished goods control account.

Summary

For your BA2 computer based assessment you must be able to account for variable

production cost variances in the context of an integrated accounting system.

This article has demonstrated the main entries that you will need to understand. The

questions and answers linked to the article will give you practise in dealing with assessment

style questions on this topic.

Practice Questions