Material Cost Variance Analysis

1 Lesson-26 Material Cost Variance Analysis Learning Objectives • • •

To know how to calculate material cost variance To know how to calculate material usage variance To know how to calculate material price variance

Terminology for Material Variance Calculation • • • • • • • • • •

SQ =Standard Quantity SR = Standard Rate AQ = Actual Quantity AP = Actual Price RSQ = Resaved STD Quantity MCV = Material Cost Variance MUV = Material Usage Variance MPV = Material Price Variance MMV = Material Mix Variance MYV = Material Yield Variance

Problem 1 The following information is obtained from X Co. Ltd. Product

SQ (Units)

SP (Rs.)

AQ (Units)

AP (Rs.)

A B C

1050 1500 2100

2.00 3.25 3.50

1100 1400 2000

2.25 3.50 3.75

Calculate the following: • • •

Material cost variance Material price variance Material usage variance

Solution 1. MCV A

B

= =

(SQ x SR) – (AQ x AR) (1050 x 2.00) – (1100 x 2.25)

=

2100 – 2475

=

(1500 x 3.25) – (1400 x 3.50)

=

4875 – 4900

=

=

Rs. 375 (A)

25 (A)

2 C

=

(2100 x 3.50) – (2000 x 7.25)

=

7350 – 7500

=

AQ (SP-AP)

A

=

1100(2.00 – 2.25) = 1100 x (0.25) = Rs. 275 (A)

B

=

1400(3.25 – 3.50) = 1400 x (-0.25) = Rs. 350 (A)

C

=

2000(3.50 – 3.75) = 2000 x (-0.25) = Rs. 500 (A) ----------------1125 A -----------------

=

SP (SQ-AQ)

A

=

2 (1050 -1100)

=

Rs. 100 (A)

B

=

3.25 (1500 – 1400) = 3.25 (100) =

Rs. 325 (F)

C

=

3.50 (2100 - 2000)

2. MPV

3. MUV

=

150 (A) -------------------550 A --------------------

= 2 (-50)

= 3.50 (100) = Rs. 350 (F) --------------575 (F) ---------------

Verification MCV = Rs. 550 (A) = 550 (A) =

MPV + MUV 1125(A) + 575 F 550 (A)

Problem 2 Product

SQ

SP

Total

AQ

AP

Total

A

10

2

20

5

3

15

B

20

3

60

10

6

60

C

20 --50 ---

6

120 ----200 -----

15 --30 ---

5

75 ----150 -----

(3) MMV

(4) MUV

Total Find out (1) MCV

(2) MPV

Sol.:

(1) MCV

=

(SQ x SR) – (AQ x AR)

A

=

(10 x 2) – (5 x 3)

=

5F

B

=

(20 x 3) – (10 x 6)

=

Nil

3 C

=

(20 x 6) – (15 x 5)

=

TOTAL

=

(2) MPV

=

(SP – AP) AQ

A

=

(2 - 3) 5

=

5A

B

=

(3 - 6) 10

=

30 A

C

=

(6 - 5) 15

=

15 F -------20 (A)

TOTAL

=

(3) MMV

=

45 F -----50 F ------

(RSQ – AQ) SP

In this total std. mix and total actual mix is difference in proportion. Now you should calculated revised STD’s. MMV RSQ

=

(RSQ – AQ) TAQ

=

SQ ---- x TAQ TSQ

A

=

10 ---- x 30 50

B

=

20 ---- x 30 50

=

12

C

=

20 ---- x 30 50

=

12

A

=

(6-5) x 2

=

2F

B

=

(12-10) x 3

=

6F

C

=

(12-15) x 6

=

18 A -------10 (A) --------

(4) MUV

=

(SQ – AQ) SP

A

=

(10 – 5) x 2

=

10 F

=

6

Now MMV

4 B

=

(20 – 10) x 3 =

30 F

C

=

(20 – 15) x 6 =

30 F -----70 F ------

Verification MCV =

MPV + MUV

50 F

=

20 A + 70 (F)

50 F

=

50 F

Problem 3 Standards

Actuals

Material

Qty Kg.

Price Total Rs. Rs.

Qty Kgs.

Price Total Rs. Rs.

P

500

6.00

3.000

400

6.00

2400

Q

400

3.75

1500

500

3.60

1800

R

300 3.00 -----1200 ------

900

400 2.80 -----1300 ------

1120

Less 10% Normal Loss

Calculate

120 ------1080 -------

Actual Loss -----5400 ------

220 -----1080 ------

-----5320 ------

(1) (3) (5)

Material cost value (2) Material mix value (4) Material yield value.

Material price value Material usage value

MCV P Q R

= = = =

(AQ x AR) (400 x 6) (500 x 3.60) (400 x 2.80)

Solution 1.

(SQ x SR) (500 x 6) (400 x 3.75) (300 x 3)

Total MCV 2.

= = = =

MPV =

(SP –AP) AQ

P

(6 -6) 400

=

-

=

Rs. 600 (F) 300 (A) 220 (A) --------------80 (F) ---------------

Nil

5 Q

=

(3.75 – 3.60) 500

=

75 (F)

R

=

(3 – 2.80) 400

=

80 (F) --------155 F --------

Total MPV

=

3. Material Mix Value

=

(RSQ – AQ) SR

For Calculation Mix Value we need to revise the Revised Standards =

SQ ---- x TAQ TSQ

P

=

500 ----- x 1300 = 541.67 kgs 1200

Q

=

400 ----- x 1308 = 433.33 kgs 1200

R

=

300 ----- x 1300 = 325 kgs 1200

P=

(541.67- 400) 6

=

850 F

Q=

(433.33 – 500) 3.75

=

250 (A)

C =

(325 - 400) 3

=

225 A ---------375 (F)

RSQ

MMV

Total MMV

=

Material Yield Variance (MYV) You may observe in the standard quantity and normal loss the actual input and actual output. Since the actual output is different, you calculate as follows. MYV = (Std. loss - Actual loss) Avg. Std. price Avg. Std. Price =

= MYV =

Total Std. cost ---------------------Total Std. output 5400 --------- = 5 Per Unit 1080

(130 - 220) 5 = Rs. 450 (A)

6 Problem 4 The standard cost of a certain chemical mixture is 40% Material A at Rs. 200 Per Ton 60% Material B at Rs. 300 Per Ton A standard loss of 10 % is expected in production. During a period, there is used 90 tons of material A at the cost of Rs. 180 per ton, 110 tons material B at the cost of Rs. 340 per ton. Calculate : 1. Material Price Variance 2. Material Mix Variance 3. Material yield Variance. Solution Working Notes Total Actual Quantity =

A

=

90 Tons

B

=

110 Tons ----------------200 Tons -----------------

Standard Quantity is A=

200 x 40%

=

80

B=

200 x 60%

=

120 -------200 ---------

Material

SQ

SP

Total

AQ

AP

Total

A

80

200

16,000

90

180

16200

B

120 300 -----200

36,000 ------52,000

110 ----200

340

37400 -------53600

Actual Loss

18 ---182 ----

Less: 10% Normal Loss 20 ----180 ----1. Material Price Variance A

=

(SP - AP) AQ

=

(200 – 180) 90

=

1800 F

7 B

=

Total MPV

=

2. Material Mix Variance

=

(300 – 340) 110

=

SR ---- x TAQ TSQ

A

=

80 ---- x 200 200

=

80

120 ----- x 120 200

=

120

=

MMV A

=

(80 – 90) 200

=

2000 (A)

B

=

(120-110) 300

=

3000 (F) ----------1000 (F) -----------

3. Material Yield Variance

Avg. Std. Price

4400 A ---------2600 (A)

(RSQ – AQ) AP

RSQ

B

=

=

(STD Loss – Actual Loss) Avg. Std. Price

=

(20 – 18) x 2.88 = 577 (F)

=

Total Std Cost ------------------Net Std. Output

=

52.000 --------- = 180

2.88

Problem 5 Rai Industries Ltd. produces an article by using two kinds of material. It operates at standard costing and the following standards have been set for raw materials: Material

Std. Mix

STD Price per kg

A B

46 % 60%

Rs. 4.00 3.00

The standard loss in processing is 15%. During April 2003, the company produced net 1700 kgs of finished product. The position of stock and purchases for the month of April 2003 is as follows: Material

Stock on

Stock on

Purchases during

Cost

8 1-4-2003 ----------35 40

A B

30-4-2003 ------------5 50

the month -----------800 1200

3400 3000

Calculate the following: • • • • •

Material usage variance Material price variance Material yield variance Material mix variance Material cost variance

Assume that material is issued on FIFO method. The opening stock was valued on standard price. Solution Working Notes a. Calculation of actual quantity used Net Actual Product is 1700 kg It is extent to 85 % 100 % Actual quantity

Material used

=

=

1700 x 100 -----85

=

2000

(Op. Stock + Purchase) - Cl. Stock

A

=

(95 + 800)

-

5

=

830

B

=

(40 + 1200)

-

50

=

1190

A

=

2000 x 40 ---100

=

830 kgs

2000 x 60 ---100

=

1200 kgs

Standard Quantity

B

=

Calculation of Actual Cost of Material used Material A: (+)

Op. Stock

=

35 x 4

(Std. Rate)

=

Purchase

=

795 x 4.25 ------830 ------

(Actual cost) =

140.00 3378.75 ---------3518.75 ---------

9 Mat – A: Actual Cost per unit =

Material B (+)

Mat – B

1. MUV A

B

3400 ------ = 800 kgs

4.25

Op stock

=

40 kgs. @ Rs.3 (Std. Rate)

Purchase

=

1150 Rs. 2.50 (Actual Rate) = -----1190 ------

Actual Rate per unit =

3000 -----1200 kgs

=

(SQ x SR)

-

(AC x AR)

=

(830 x 4)

-

{(35 x 4) + (795 x 4.25)}

3320

-

3518.75 = 198.75 A

(1190 x 3)

-

{(40 x 3) + (1150 x 2.50)}

3570

-

2995

MPV = A = B =

SR (SQ - AQ) 4 (800 - 830) 3 (1200 – 1190)

= =

Total 3. Material Yield Variance Avg. Std. Price

=

198.75 A

=

575. F --------376.25 (F) -------------

120 (A) 30 F --------90 (A) ---------

(Stand. loss – Actual loss) Avg. Std. Price =

A

=

800 kgs @ 4 =

3200

B

=

1200 kgs @ 3 =

3600 -------6800 --------

Total Cost Avg. Std. Price

Std Loss Std. output

=

= Input (-) 15% loss

2875.00 ----------6513.75 ----------

=

Total MUV 2.

120.00

2.50

=

=

=

6800 ------- = 4 2000 = =

2000 300 -----1700 ------

10 Actual yield

=

For 2000 Std. input 2020

=

1700

=?

1700 ------ x 2020 = 1717 2000 Actual input = (-) Actual production = Actual loss

=

Material Yield Variance

2000 1717 -----283 -----= (300-283) 4

=

68(A)