Disposition of Variances

BOOK:

1. Interim Period Statements

a. Planned fluctuation within the annual period, variance balance will be
carried forward in the variance account, (reported as a balance sheet
item)
b. Did not result from a planned fluctuation within the annual period +
material, variance is allocated relevant inventory balances and to cost
of goods sold based on the relative amounts of each
2. Year-end statements:
a. Significant, allocated to relevant inventory balances and to cost of
goods sold based on the relative amounts of each other
b. Insignificant, closed directly into cost of goods sold or Income
Summary

OR

(Youtube Video: https://www.youtube.com/watch?v=NEgk4AWOVqc 15:00)

(a) If the variance is INSIGNIFICANT

The variance is closed or charged to Cost of Goods Sold (COGS).

FAVORABLE VARIANCE: (-) Income Account against the nature of the

COGS so deduct
UNFAVORABLE VARIANCE: (+) Expense Account so add to COGS

(b) If the variance is SIGNIFICANT

The variance is closed or charged to Cost of Goods Sold (COGS), Finished
Goods and Work-in-Process Inventory proportionately

FAVORABLE VARIANCE: (-)

UNFAVORABLE VARIANCE: (+)

So what does proportionately means?

The disposition of the variance or closing these amounts is based on the
carrying amount or the balance of COGS, FG inventory and WIP Inventory

E.g.

Amount of the Variance is Php 10,000

Balance of COGS: Php 100,000
Balance of FG inventory: Php 100,000
Balance of WIP inventory: Php 100,00
 Since the balances are equal therefore the distribution or allocation of the
variance between these are also equal

Variance closed to Income Summary (BOOK)

1ST PARAGRAPH

Variances are deviations from contemplated costs due to abnormal inactivity,

extravagance inefficiencies or rather changes of business conditions.

Variances caused by fortuitous events:

UNFAVORABLE VARIANCE: (+) debited to COGS
FAVORABLE VARIANCE: (-) credited to COGS

2nd PARAGRAPH

Variances are considered a manufacturing function responsibility:

- Closed to COGS

UNFAVORABLE VARIANCE: (-) from the Gross Profit calculated at std. cost
FAVORABLE VARIANCE: (+) to the GP calculated at std. cost

And then total amount in COGS (the std. cost of units sold + variance) would then
be closed Income Summary

Variances closed to COGS account will appear in the COGS statement.

Variances closed to IS account will appear in the Income Statement

The treatment of variances depends upon the:

1. The type of variance

2. Size of variance
3. Experience with std. cost
4. Cause of variance
5. Timing of variance

At the end of the year, variance std. must be disposed in the accounting records.
The variances may be:

1. Viewed as losses due to inefficiency and closed to Income Statement

2. Allocates as adjustments to the recorded cost of WIP, FG & COGS or
3. Closed to COGS
IN THEORY,

The alternative chosen should depend upon whether the standards set were
attainable and whether the variances were controllable by company employees

E.g.

Causes Effect
Unfavorable materials Carelessness or Considered a loss and
usage or labor efficiency inefficiency closed to Income
variance Summary
Unfavorable material Unexpected price change Added cost and allocated
Variance to the inventory accounts
and COGS

IN ACTUAL PRACTICE,
Variances are usually closed to COGS.
 SLIDE 1
SLIDE 2
SLIDE 3
So what does proportionately mean?
The disposition of the variance or closing
these amounts would be based on the
carrying amount or the balance of COGS,
FG inventory and WIP Inventory
Disposition of Variances focuses on where
are variances disposed or on which
account they are closed. The procedure
differs for interim period statements and
year-end statements. Let’s start with
interim statements.
So, if the variance resulted from the
planned fluctuation within the annual
period, the variance balance is simply
being carried forward in the variance
account and is reported as a balance sheet
item on the interim statement.
Second, is if the variance does not result
from a planned fluctuation within the
annual period and it is material, the
variance is to be allocated to the relevant
inventory balances and to cost of goods
sold.
For year-end statements, it depends on
the significance of the variance. When the
variance is INSIGNIFICANT or
IMMATERIAL, then the variance is closed
or charged to Cost of Goods Sold. The way
of disposing also depends whether if it is
favorable or unfavorable.
If the variance is favorable, it is to be
deducted against COGS since favorable
variance is an income account. Unlike
Unfavorable variance, which is an expense
account, and since COGS is also an
expense account, we add them together.
Now, if the variance is SIGNIFICANT or
MATERIAL, then the variance is charged
to COGS, FG inventory, and WIP inventory
proportionately.
Variances are deviations from contemplated costs due to abnormal inactivity,
extravagance inefficiencies or rather changes of business conditions. Anything outside the
acceptable tolerance limit should be written off since they represent loss. And they closed
to the Income Summary Account

When there are variances caused by fortuitous events, like storms, depression, labor
disputes and many more, they are adjusted and closed to cost to goods sold. Unfavorable
variance is added, while favorable variance is deducted to the Cost of Goods Sold account.

When variances are considered a manufacturing function responsibility, they are closed a
COGS account. UNFAVORABLE VARIANCE: (-) deducted from the Gross Profit at std. cost.
FAVORABLE VARIANCE: (+) added to the Gross Profit at std. cost

And then total amount in COGS (the std. cost of units sold + variance) would then be
closed Income Summary.

Variances closed to COGS account will appear in the COGS statement. Variances closed to
IS account will appear in the Income Statement