In manufacturing what is capitalized variance?

Answer 1

In a manufacturing context, capitalized variances are the portion of a manufacturing variance that gets capitalized as part of the inventory values. Considering a simple start up example, suppose that in order to manaufacturer a certain quantity of finished goods, your standard or Bill of Materials (recipe) calls for $100 of raw materials to produce 10 units. Just before you start manufacturing your assistant slips and spills the $100 worth of raw materials on the floor. After picking him up off the floor and cleaning up the mess, you once again set out to make those 10 units. This time you collect the raw materials and the process flows perfectly such that you have the 10 units at what your standard cost said you should have made them for. You do no more manufacturing in the month and at the end end you have sold 5 of the 10 units. Now when you evaluate your month end inventory you realize that you have less raw materials on the shelf than your standards say you should have. You then remember the accident and try to figure out how you are going to account for the spill. If you assume your only MFG cost is materials, your Cost of Goods Produced at standard would be $100 (for the 10 units) and to account for the spill, you would have an efficiency variance (it took more materials because of the spill) of $100. Your cost of Goods Sold at standard would be $50, and then you have to figure out how much of the $100 variance you should recognize in the current period and how much of the spill is a CAPITALIZED VARIANCE. Under the accounting theory of matching, Revenue with Expense, the proper accounting is to recognixe half of the negative variance of $50 in the current month (since half of the goods produced were sold to Third parties in the month) and capitalize the remaining $50 negative variance along with the standard cost of the product on the balance sheet. When you sell the remaining 5 units, they will have a cost basis of $100 ($50 at standard and $ recognition of the $50 negative variance). This was a very simple example and other rules apply that would require certain variances that were one time in nature to be excluded from the calculations.