Journal Entries for Variable Overhead Costs and Variances

We now prepare journal entries for the Variable Overhead Control account and the contra account Variable Overhead Allocated.

Entries for variable overhead for April 2020 (data from Exhibit 8-1) are as follows:

A table shows journal entries for variable overhead for April 2020

The table depicts journal entries for variable overhead for April 2020. The details of the table are as follows:

1. Variable overhead control: 130,500

2. Work-in-process control: 120,000

3. Variable overhead allocated: 120,000

These variances are the underallocated or overallocated variable overhead costs. At the end of the fiscal year, the variance accounts are written off to cost of goods sold if immaterial in amount. If the variances are material in amount, they are prorated among the Work-in-Process Control, Finished-Goods Control, and Cost of Goods Sold accounts on the basis of the variable overhead allocated to these accounts, as described in Chapter 4. As we discussed in Chapter 4, only unavoidable costs are prorated. Any part of the variances attributable to avoidable inefficiency is written off in the period. Assume that the balances in the variable overhead variance accounts as of April 2020 are also the balances at the end of the 2020 fiscal year and are immaterial in amount. The following journal entry records the write-off of the variance accounts to the Cost of Goods Sold:

A table shows a journal entry that records the write-off of the variance accounts to the cost of goods sold

The table depicts a journal entry that records the write-off of the variance accounts to the cost of goods sold. The details of the table are as follows:

1. Cost of goods sold: 10,500

2. Variable overhead spending variance: 4,500

3. Variable overhead efficiency variance: 15,000

Next we demonstrate how to calculate fixed overhead cost variances.