University:
Baltimore City Community College
Course:
ACT 221 | Principles of Financial Accounting I
Academic year:

2024
Views:

407

Pages:

2
Author:

Danny A.

Trading Variances There may be cases in which an unfavorable variance is not unfavora-ble. Consider the following example. The Lexington Ornamental Iron Works produces ornamental railings, gates, fences, and so on. The purchasing agent has consistently purchased the least expensive welding rod available to use in producing the company's products. The current standard cost for a 1/8 x 18 inch welding rod is $0.28. Last month a salesman from a competing welding rod company convinced the purchasing agent to order one month's supply of a new 1/8 × 18 inch welding rod that, because of a special flux coating, could deposit 3 inches more weld than the standard rods now being used (that deposit 8 inches of weld). The new rods cost $0.35 each, or $0.07 more. The purchasing agent ordered 400 rods that were used during the month. Production this past month required 4,400 inches of weld. Following is an analysis of the company's direct material variances for the month. Consequently, by increasing the quality of the direct material in-put, Lexington Ornamental Iron Works produced a large enough favorable usage variance to offset the unfavorable price variance. The installation and operation of a standard cost system is further discussed in the practical insight. Recording Variances In The Accounting Records The isolation of cost and quantity variances for responsibility and control purposes does not necessarily result in these variances being recorded in the accounting records. Some companies use standard costing only for control purposes, whereas others may actually record variances in the accounting records. For those companies that record variances in the accounts, many different systems are available, and a company's accounting system should be designed to report the maximum amount of information at the least cost. One of the most frequently used methods of recording cost and quantity variances in the accounting records is to debit the actual costs incurred during an accounting period to the Direct Materials and Direct Labor accounts. Subsequently, when the direct materials and direct labor are used in production, these accounts are credited for the actual cost incurred, but Workin-Process is debited for the standard cost. The differences between the amount charged to Work-in-Process and the credits to Direct Materials and Direct Labor are recorded as variances. The following is an example of the process for the Bellow Corporation: