Calculate material variances from the above data

Working table populated with the information that can be obtained as it is from the problem data

Output (_O) is in units of measurement of output, Quantities (_Q) are in units of measurement of input, Prices (_P) are in monetary value per unit input and Costs (_C) are in monetary values.

Assuming the input and output are in kgs for the purpose of explanations.

The rest of the information that we make use of in problem solving is filled through calculations.

Material Cost Variance is the variance between the standard cost of materials for actual output and the actual cost of materials.

⇒ Material Cost Variance (MCV)

Actual Cost

Standard Cost for Actual Output

Formula in useful forms

Note

• ×

  AO

  SO

  replaces the suffix (AO) in calculations
• Using the formula based on output is prudent when the only data that is available is the data in the formula i.e. SC/UO, AC/UO and the AO.

  In other cases where we are required to calculated SC/UO and AC/UO we need the SC and AC data which can be straight away used for finding the MCV.

For each Material separately

Material Cost variance for a material

For all Materials together

Total Material Cost variance

Material Cost variance for the Mix

TMCV = MCV_Mix

⋇ SQIL = SI − SO

⋇ AQIL = AI − AO

⋇ SC(AO) = SQ(AO) × SP

⋇ SO(AO) = AO

⋇ SCIL(AO) = SQIL(AO) × SP

MCV = SC(AO) − AC

Material Cost Variance due to

Alternative - Formula Based on Output

• Calculating Costs in a working table

  Calculate SC and AC based on the given data in a working table and then use formulae based on costs.

  Working Table

  	Standard			Actual
  	for SO
  	SQ	SP	SC	AQ	AP	AC
  Material A Material B Material C	900 800 200	15 45 85	13,500 36,000 17,000	2,250 1,950 550	16 42 90	36,000 81,900 41,800
  Total/Mix	1,900		66,500	4,750		1,67,400
  Output	1,800 SO			4,320 AO

  ⋇ SC = SQ × SP

  ⋇ AC = AQ × AP

  MCV

  =

  SC × AO SO − AC

• Using Formula with Quantities and Prices

  Using the quantity and price data from the working table built using the problem data we may do all the working in the formula itself if we expand the formula using the relation cost = quantity × price.

  Working Table

  	Standard		Actual
  	for SO
  	SQ	SP	AQ	AP
  Material A Material B Material C	900 800 200	15 45 85	2,250 1,950 550	16 42 90
  Total/Mix	1,900		4,750
  Output	1,800 SO		4,320 AO

  MCV = SQ ×

  AO

  SO

  × SP − AQ × AP

• Formula based on outputs

  MCV = AO × (SC/UO − AC/UO)

  Calculation of SC/UO requires the SC data and AC/UO requires the AC data. When these are available we can straight away use the other formulae instead of calculating SC/UO and AC/UO.

  This formula does not require the data from recalculated standards.

• Nature of Variance

  Based on the relations derived from the formulae for calculating MCV, we can identify the nature of Variance

  • SC(AO) ___ AC

  MCV_Mat

  • SC(AO)_Mat ___ AC_Mat

  MCV_Mix

  • SC(AO)_Mix ___ AC_Mix

  The variance would be

  • zero when =
  • Positive when >
  • Negative when <

  TMCV

  Variance of Mix and Total Variance are the same.

  Variance_Mix provides a method to find the total variance through calculations instead of by just adding up individual variances.

• Interpretation of the Variance

  For each material, for the actual output achieved

  Variance	Cost incurred is	indicating
  None	as per standard	efficiency
  Positive	lesser than standard	efficiency
  Negative	greater than standard	inefficiency

  Similar conclusions can be drawn for the mix based on the mix variance. However, it should be noted that the mix variance is an aggregate of individual variances and as such reflects their net effect.

  Mix variance data would be helpful to get an overall idea only. It would not be as useful as individual variances data in taking corrective actions.

  Eg: When the Total Variance is zero, we cannot conclude that the cost incurred on all materials is as per standard, as it might have been zero on account of

  1. each material variance being zero, or
  2. the unfavourable variance due to one or more materials is set off by the favourable variance due to one or more other materials.

• Who is answerable for the Variance?

  Since Material Cost Variance represents the total difference on account of a number of factors it would not be possible to directly fix the responsibility for the variance. This explains the reason for analysing the variance and segregating it into its constituent parts.

• MCV = MPV + MQV
• MCV = MPV + MMV + MYV

Verification

Building a table as below would help

By including a column for formula, this format would also work as the simplest format for calculating and presenting variances after building the working table