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Why is there a Balance in the Job Cost Variance Account?

Why is there a balance in the Job Cost Variance Account?

Note: Vision and Advantage handle the Job Cost Variance in the same way. For this reason, this article applies to both Advantage and Vision.

Cause: 

The Job Cost Variance is the difference between the standard cost rate (based on an employee's hourly or salary rate as entered through Employee Table Maintenance) and pay rate (basis of an employee's payroll check). When cost rates and pay rates differ, Vision\Advantage depends on the Job Cost Variance account to increase or decrease total indirect expenses so that the labor accounts plus the variance equals the actual payroll expense. The main purpose of this account is to provide accurate job cost reports while maintaining the actual payroll expense in the general ledger.

Resolution: 

The following examples demonstrate how to use the Job Cost Variance account: 

Example 1 - Time sheet Entry:                               Debit                    Credit 

Direct labor expense:
     601.00 Direct Labor - Principals                    $600.00
     602.00 Direct Labor - Employees                  $400.00
Total                                                                $1,000.00

Indirect labor expense:
     703.00 Job Cost Variance                                                        $1,000.00

1. When posting time sheets, the amounts net to zero resulting in no change from the financial accounting perspective of the Vision\Advantage systems.
2. However, from the project management perspective, the project reports do reflect a change.
3. They reflect up-to-date job costs after time sheet postings. 

Note: The financial accounting perspective will be affected only when a payroll is actually recorded, that is, when the Job Cost Variance account (703.00) is debited. Thus, the Job Cost Variance account has no effect on the Income Statement until you actually process a payroll. At that point, the Job Cost Variance account could affect your firm's indirect expenses in one of several ways, depending on your firm's cost/pay methods.

Example 2 - Credit Balance in the Job Cost Variance Account

                                                                      Regular Hours              Overtime Hours
Actual labor worked by an employee                  40.0                                    5.0

Labor posted to the project                                 40.0                                    5.0

Payroll processed for the employee                    40.0                                   0.0 

1. Because all the hours, including the overtime hours, will be posted to the project (for accurate project reporting), and only the regular hours will be processed for payroll (for salaried employees), the pay rate debited to Job Cost Variance account 703.00 will be less than the time sheet cost rate credited to 703.00.
2. The balance remaining in 703.00 after payroll is processed will be a credit balance (that is, a negative amount). Vision\Advantage reduces the indirect expenses by the overtime, or credit balance, amount.
3. This credit is the difference between the amount charged to the projects by your employees and what you pay the employees.

Note: A credit, or negative, Job Cost Variance balance indicates that pay rates are lower than cost rates. This situation occurs when salaried personnel work overtime or charge more than 40 hours on a project and do not receive additional pay. Vision/Advantage accounts for all job costs in its project reports. 

Example 3 - Debit Balance in the Job Cost Variance Account 

Bonus paid to employee(s) 

1. Job Cost Variance account 703.00 is debited for the amount of the bonus pay rate, since there are no associated cost amounts (that is, no time sheets posted for a bonus).
2. After the bonus payroll is processed, the balance remaining in account 703.00 will be a debit balance (that is, a positive amount). Vision\Advantage increases the indirect expenses to reflect the additional cash outlay. 

Example 4 - Zero balance in the Job Cost Variance Account 

Cost Rates = Pay Rates

1. Appropriate entries are made to the Job Cost Variance account, labor accounts, tax withholdings, and salaries payable account.
2. Indirect expenses remain unchanged because the credit and debit sides of the Job Cost Variance account cancel each other out.
3. If you have the Payroll Application installed, a zero balance can also appear in this account if the Job Cost Rate for an employee is a salaried amount and equals the Pay Rate for that employee as defined in the Payroll Application. 

Note:  Typically a zero balance would occur if all employees are hourly employees or you are using the Adjust Salaried Job Cost Feature.