INTERNAL ACCOUNTING ENGINEERING
Allocation of Direct Material
3. Direct Material Transactions.
Direct Material costs are allocated to Product Cost accounts, not to Departments.
A key factor in Variance Reporting is Stores Inventory data. There are three
kinds of Stores Withdrawals: Supplies withdrawals for Departments, Raw Materials withdrawals for Production, and Inventory withdrawals for Sales.
Stores Withdrawals for Direct Material (2-3-00) are charged to Production (5-n). Internal Accounting uses a Standard Cost basis in the following manner: Actual prices and quantities are transformed using Internal accounts into a Price Variance with the formula, ((Aq*Ap) - (Aq*Sp)), and then into an Efficiency Variance with the formula ((Aq*Sp) - (Sq*Sp)). Finally, the amount (Sq*Sp) is charged to the Product Job Order.
Direct Materials Efficiency Variance:
Materials Efficiency Variances will report the actual count of materials withdrawn for the
compared with a Budget.
Direct materials Price Variance:
For Price Variance reports we focus upon Raw Materials withdrawals. If we
withdraw something from Stores this month, there is no guarantee it will have
the same Actual cost as last month. It may vary from our Budgeted, Standard
costs. The monthly variance can be measured by reporting Stores data.