Sage 50 Accounting – Explanation of Variance

Variance shows up when you allow inventory levels to go below zero. It is used to track the difference between the average cost and the actual cost of an inventory. Variance is not harmful. It indicates that Sage 50 is accurately posting cost information in the absence of purchase cost information.

The following example shows how variance is calculated.

Transaction 1:   Suppose the current item quantity is 10 and the value is $50. The cost of each item is $5 ($50/10).

Transaction 2:   On the next day, 30 items are sold. Even though there are only 10 items on hand, Sage 50 calculates the cost for the 30 items using the existing cost information of $5 per item. The total cost amount is $150 ($5*30).

Transaction 3:   On the following day, 40 items are purchased at $12 per unit. For the 20 units of the item that were previously sold, Sage 50 will adjust cost to $7 per unit. This is due to the fact that the cost was already calculated at $5 per unit for 20 units of the item that were sold previously.

(new cost – $12) – (old cost -$5) = $7 variance per item

The total variance is then calculated by $7 * 20 = $140

This is the general ledger report of the inventory asset account

Description

Debits

Credits

Balance

Transaction 1

50

50 Dr

Transaction 2

150

100 Cr

Transaction 3

340

240 Dr

The $340 debit in transaction 3 is calculated by:

(Total cost in transaction 3 – 40*$12 = $480) – (variance – $140) = $340

After Transaction 3, the item quantity is 20 and the value is $240. Therefore, the cost of each item is $12. $140 will be debited to the variance expense account. This is how variance properly reflects the cost of the inventory.

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