How do you prepare the general journal entry to record a direct materials price variance under standard costing (accounts: Direct Materials, Direct Materials Price Variance, Accounts Payable), listing the inventory account first?

General Journal\nDebit Credit\nDirect Materials \nDirect Materials Price Variance \nAccounts Payable \n

How do you prepare the general journal entry to record a direct materials price variance under stand...

Answer

Record the materials inventory at standard cost, record the Direct Materials Price Variance for the difference between actual and standard, and credit Accounts Payable for the actual purchase cost: Debit Direct Materials (at standard cost), Debit Direct Materials Price Variance if unfavorable (or Credit if favorable), Credit Accounts Payable (at actual cost). In symbols: Dr Direct Materials $(SQ\times SP)$; Dr/Cr DM Price Variance $(AQ\times AP)-(AQ\times SP)$; Cr Accounts Payable $(AQ\times AP)$.

Explanation

What this journal entry is doing

In a standard costing system, purchases of direct materials are recorded into inventory at the standard price, not the vendor invoice price. The gap between what you actually pay and the standard price is separated into the Direct Materials Price Variance account.

Accounts involved (from the source text)

Direct Materials (materials inventory): recorded at standard cost
Direct Materials Price Variance: captures price differences
Accounts Payable: recorded at the actual invoice amount

Building the entry with standard costing amounts

Let:

$AQ$ = actual quantity purchased
$AP$ = actual price per unit
$SP$ = standard price per unit

Then:

Direct Materials is recorded at standard: $AQ\times SP$
Accounts Payable is recorded at actual: $AQ\times AP$
Price variance is the difference: $AQ\times(AP-SP)$

Journal entry format (inventory first, then variance)

$$\text{Dr Direct Materials} \quad AQ\times SP$$ $$\text{Dr Direct Materials Price Variance (if }AP>SP\text{)} \quad AQ\times(AP-SP)$$ $$\text{Cr Accounts Payable} \quad AQ\times AP$$

If the actual price is lower than standard ($AP<SP$), the variance is favorable and you record it as a credit instead of a debit: $$\text{Cr Direct Materials Price Variance} \quad AQ\times(SP-AP)$$

Quick check so you know it balances

Debits will equal credits because: $$(AQ\times SP) + (AQ\times AP - AQ\times SP) = AQ\times AP$$

Skills You Achive

cost accounting journal entries standard costing variance analysis