The cost amounts associated with production and disassembly entries are posted to different general ledger accounts based on the product line of each affected item or the account associated with any miscellaneous charge codes.
The cost roll-up process facilitates the recalculation of a manufactured item's standard cost. Any change to an item's standard cost does not require general ledger postings unless the item uses the Standard Cost valuation method. As a result of the recalculation, the value of the item is increased or decreased by the net change of the standard cost, multiplied by the item's quantity on hand. The Manufacturing Variance adjustment account is used to reconcile this difference to the general ledger.
Production Entry Postings Example
The following General Ledger posting is made for a transaction involving the production of a single item whose component costs (including miscellaneous charges) total $200.00.
G/L Account
Debit
Credit
Parent Item
Inventory (Finished)
200.00
Component A (5 @ $10.00)
Inventory (Raw Mat.)
50.00
Component B (3 @ $20.00)
Inventory (Raw Mat.)
60.00
Component C (3 @ $25.00)
Inventory (Raw Mat.)
75.00
Misc. Charge (1 @ $15.00)
Applied Expense
______
15.00
200.00
200.00
This General Ledger posting illustrates the receipt (into inventory) of the parent item produced and the issue (from inventory) of each component consumed. The $200.00 debit represents the receipt of the parent item. The $50.00, $60.00, and $75.00 credits represent the issue of each component group. The $15.00 miscellaneous charge represents the applied expense required for the item's production.
Adjustments for Lot or Serial Items
If the parent item is valued using the Lot or Serial method, an adjustment may be required to reconcile the rounding difference that occurs when allocating the total production cost to the number of parent items produced.
The following General Ledger posting is made for a transaction involving the production of 1000 items. The component costs of producing all of the items (including miscellaneous charges) total $1005.50. The cost applied to each serial item is calculated by dividing the total cost by the number of items produced ($1005.50 / 1000 = $1.0055). The $1.0055 result is then rounded to $1.01 per item.
G/L Account
Debit
Credit
Serialized Parent Item
Inventory (Finished)
1010.00
Cost Difference
Mfg. Var. Adjustment
4.50
Component A (1 @ $0.20)
Inventory (Raw Mat.)
200.00
Component B (5 @ $0.10)
Inventory (Raw Mat.)
500.00
Component C (2 @ $0.15)
Inventory (Raw Mat.)
300.00
Misc. Charge (1 @ $5.50)
Applied Expense
______
5.50
1010.00
1010.00
This General Ledger posting illustrates the use of the adjustment account to reconcile the rounding difference created when the total cost of producing 1,000 items is allocated to each of the parent items produced. The $1010.00 debit represents the receipt of 1,000 parent items at a unit cost of $1.01. The $200.00, $500.00, and $300.00 credits represent the issue of each component. The $5.50 credit represents the applied expense required to produce the items. To offset the difference between the rounded cost of the parent and the total value of the components and miscellaneous charges, $4.50 is credited to the adjustment account. If the parent item's rounded cost is exceeded by the total value of the components and miscellaneous charges, the difference is debited to the adjustment account.
Adjustments for Standard Cost Items
If the parent item is valued using the Standard Cost method, an adjustment may be required to reconcile the difference between the sum of the component item costs and the standard cost of the parent. Using the example provided under Production Entry Postings in this topic, assume that the standard cost of the parent item is $195.00.
G/L Account
Debit
Credit
Inventory (Finished)
195.00
Cost Difference
Mfg. Var. Adjustment
5.00
Component A (5 @ $10.00)
Inventory (Raw Mat.)
50.00
Component B (3 @ $20.00)
Inventory (Raw Mat.)
60.00
Component C (3 @ $25.00)
Inventory (Raw Mat.)
75.00
Misc. Charge (1 @ $15.00)
Applied Expense
______
_15.00
200.00
200.00
This General Ledger posting illustrates the use of the adjustment account to reconcile the $5.00 difference between the parent item's standard cost and the sum of the component item costs and miscellaneous charges. The $195.00 debit represents the receipt of the parent item. The $50.00, $60.00, and $75.00 credits represent the issue of each component. The $15.00 credit represents the applied expense required for the item's production.
To offset the difference between the standard cost of the parent item ($195.00) and the total value of the components and miscellaneous charges ($200.00), $5.00 is debited to the adjustment account. If the parent item's standard cost is exceeded by the total value of the components and miscellaneous charges, the difference is credited to the adjustment account.
Disassembly Entry Postings Example
The following General Ledger posting is made for a transaction involving the disassembly of a single-produced item valued at $200.00.
G/L Account
Debit
Credit
Component A (5 @ $10.00)
Inventory (Raw Mat.)
50.00
Component B (3 @ $20.00)
Inventory (Raw Mat.)
60.00
Component C (3 @ $25.00)
Inventory (Raw Mat.)
75.00
Cost Difference
Mfg. Var. Adjustment
15.00
Parent Item
Inventory (Finished)
______
200.00
200.00
200.00
This General Ledger posting illustrates the receipt (into inventory) of each component consumed when the item was originally manufactured and the issue (from inventory) of the parent item disassembled. The $50.00, $60.00, and $75.00 debits represent the return to stock of each component group. The $15.00 adjustment represents the difference between the cost of the parent item being relieved and the total cost of the component items (miscellaneous charges, and scrap and yield cannot be recovered) being received. The $200.00 credit represents the actual inventory cost of the parent item.
Cost Roll-Up Postings Example
The cost roll-up process facilitates the recalculation of a manufactured item's standard cost. Any change to an item's standard cost does not require General Ledger postings unless the item uses the Standard Cost valuation method. In this case, the value of the item is increased or decreased by the net change of the standard cost, multiplied by the item's quantity on hand. The Manufacturing Variance adjustment account is used to reconcile this difference to the general ledger.
The following example illustrates the cost difference incurred when cost roll-up is performed for an item using the Standard Cost valuation method whose initial standard cost is $200.00. Assume 10 units are stocked in inventory.
Standard Cost
Quantity
Extend Cost
Before Roll-Up
200.00
10.00 ea
2,000.00
After Roll-Up
205.50
10.00 ea
2,055.00
Cost Difference
55.00
The following General Ledger posting illustrates the reconciliation of the cost difference to the general ledger.
G/L Account
Debit
Credit
Parent Item
Inventory (Finished)
55.00
Cost Difference
Mfg. Var. Adjustment
_____
55.00
55.00
55.00
This General Ledger posting illustrates the increase in the inventory value caused by cost roll-up. The $55.00 debit represents the additional value added to inventory. The $55.00 credit posted to the Manufacturing Variance adjustment account offsets the increase to inventory.
If cost roll-up causes a net decrease in the parent item's standard cost, the difference is credited to the Inventory account and debited to the Inventory Adjustment account.
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