Phonological processes result in surface variants of the same words across phonological contexts, posing potential word learning challenges for children. Mandarin tone sandhi is a tonal process changing Tone 3 (T3) in different tonal and syntactic contexts, resulting in allophonic variants of T3 in connected speech. Previous studies found that Mandarin-learning 3-year-olds were able to productively apply tone sandhi processes in novel compounds, correctly using the allophonic variants of T3 in appropriate tone sandhi contexts (Tang et al., 2018, 2019). However, it remains unclear how these variants are represented in children's mental lexicon. This study, therefore, examined Mandarin-learning children's perceptual representation of allophonic variants of T3. Ninety-four 3- to 5-year-olds and 29 adults were tested. Sensitivity to allophonic mispronunciations of T3 syllables in novel tone sandhi compounds was measured using a visual fixation procedure. The results showed that children, like adults, treated tone sandhi mispronunciations as target-like. Thus, in recognizing novel tone sandhi words, Mandarin-speaking children exhibit flexibility in accommodating the allophonic variants of T3, suggesting that they have developed an abstract T3 category in their mental lexicon. The findings reveal the effect of phonological processes in shaping children's phonological representations.