1. Introduction and Objectives
To integrate standard costing into corporate financial systems, inventory accounts must be recorded at their standard values, with variances isolated in separate ledger accounts. This lesson outlines the standard accounting journal entries required under GAAP and IFRS guidelines.
 
2. Core Standard Ledger Journal Layouts
  • Recording Raw Material Purchases (Isolating MPV at procurement):
    • Debit: Raw Materials Inventory (Actual Quantity × Standard Price)
    • Debit/Credit: Material Price Variance Account (Isolates the price difference)
    • Credit: Accounts Payable (Actual Quantity × Actual Price)

  • Issuing Materials to Production (Isolating MQV):
    • Debit: Work-in-Progress Inventory (Standard Quantity Allowed × Standard Price)
    • Debit/Credit: Material Quantity Variance Account (Isolates the usage difference)
    • Credit: Raw Materials Inventory (Actual Quantity Used × Standard Price)

  • Recording Direct Payroll (Isolating LRV and LEV):
    • Debit: Work-in-Progress Inventory (Standard Hours Allowed × Standard Rate)
    • Debit/Credit: Labor Efficiency Variance Account
    • Debit/Credit: Labor Rate Variance Account
    • Credit: Factory Wages Payable (Actual Hours Paid × Actual Rate)

3. Closing Variance Accounts
At the end of the fiscal period, variance accounts are temporary ledgers that must be cleared. Immaterial balances are closed directly to Cost of Goods Sold (COGS), while material balances are prorated across WIP, Finished Goods, and COGS to adjust ending inventories to actual costs.
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