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How would variance analysis and the usual processes work if there is a situation where not all products that have been produced are sold. Do you conduct variance analysis on the proportion of costs that have been incurred by goods that have been sold?
Almost always not all the production will have been sold (and equally not all the materials purchases will not always have been used).
However the inventories are always valued at standard cost which is why the workings are as they are.
I do explain all of this in my free lectures. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Thanks for the reply.
I see. However, if a question states there is no opening or closing work in progress what would you do there? From what I understand work in progress refers to raw materials, labour etc… so wouldn’t it imply there are no materials left over? Even though it is clear there are left over materials
Work-in-progress refers to goods that have been partly made, and there will never be work-in-progress in variance analysis questions.
Inventories of raw materials and finished goods certainly can exist.I am surprised that you are not clear what work-in-progress is because although it is not relevant for variance analysis questions in the exam, it is certainly examined in Process Costing questions (which again is explained in detail in my free lectures).
Ah my mistake, apologies.
One more question, I have reviewed your lecture on this topic as well as consolidated Chapter 26 from your notes and dealing with inventory is simple as you suggested.
However, how do you cost unused materials in inventory?
I have added unused materials to my inventory at their standard cost as you mentioned in your lecture this would be the case. But, because of the difference in actual cost and standard cost of materials, the profit in the actual budget does not fully represent all the costs incurred. Would I therefore charge the inventory of unused materials at their actual cost?
No – for variance analysis we always value inventories at standard cost.
Remember that we are not producing financial accounts (where we do value inventories at their actual cost). With variance analysis we are simply checking month by month (in practice) to see whether be are over or under spending.
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