In the process of studying variance analysis, I gradually developed a framework of understanding: for processes that generate work-in-process (WIP), processing costs should be absorbed into WIP inventory; meanwhile, the raw material portion within WIP inventory should be measured based on standard usage before the preparation of financial reports. Accordingly, raw material inventory is reduced based on actual consumption. However, after the financial report is generated, raw material usage variances are added to the standard usage, and the book value of WIP inventory is adjusted accordingly.

My question is: when a process converts raw materials into another raw material for use by downstream processes that truly generate WIP, how should this variance analysis mechanism operate? Specifically, does this "raw material to raw material" conversion process differ fundamentally from the "raw material to WIP" process in terms of cost absorption and variance accumulation?

For ease of discussion, I assume a typical scenario: a chemical plant reacts basic chemical A to produce intermediate B, which is then used as a raw material in the production line of final product C (which generates WIP). Under the current standard cost system, the input of A is included in the inventory cost of B based on standard usage, and the variance between actual usage and standard usage is adjusted at the financial reporting date. However, B itself is not WIP but another raw material. So, should the inventory valuation of B follow the same logic of "standard usage plus variance adjustment"?

Further thinking, if there are processing costs (such as labor, energy) in the production process of B, should these costs be absorbed into the inventory value of B like WIP? Or, because B is a raw material, should its cost only include direct material components? I tend to believe that as long as B is intermediate inventory held for subsequent production, its cost should reasonably include processing expenses, but the timing of variance analysis treatment may differ.

Furthermore, when B is issued to the downstream WIP process, should the inventory cost of B (including accumulated variances) be transferred to WIP as "actual cost" rather than continuing to use standard cost? This may cause variances to be deferred between processes rather than recognized immediately at a single stage.

In summary, I sincerely seek guidance from experienced peers or experts: in the process of raw material converting into raw material, what principles should be followed for the accumulation of standard costs and variances? Should "direct material variances" and "processing cost variances" be distinguished and handled separately? Is the timing of financial report adjustments consistent with the WIP process?