Page 171 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes for a firm. If not, otherwise, the excessive/exorbitant cost of purchase of raw material more than

the standard is unfavourable/adverse for the firm, the reason is the firm has paid more on the
cost towards the purchase of materials than the planned one.
Material Usage or Quantity Variance

The variance/deviation is in between the standard quantity of materials and the actual quantity of
materials consumed. The found variance in Kg of raw materials should be expressed in monetary
values i.e in terms of Rupees, through the multiplication with the standard price. The ultimate
aim of expressing the variance in terms of standard price is the price, which is totally free from

market fluctuations, i.e. supply and demand factors of the market.
Materials Usage Variance = Standard Price × (Standard quantity of materials for actual
output – Actual quantity of materials used)

Example: (Output more than one unit)

Standard quantity of raw materials required to produce one unit of X was 10 kgs @ ` 6 per Kg.
Actual units produced during that period were 500 units. Actual quantity of materials was
5500 Kgs @ ` 5.5 Kg.
Calculate the material cost, price and usage variance.

Solution:
From the above problem, it came to understand that the actual production of a firm is more than

a unit, i.e. 500 units.
Standard quantity of raw materials for actual output has to be computed to the tune of actual
production 500 units.
Standard quantity of raw materials foe actual output = Standard Quantity of Materials × Acutal
Production
For One unit of out put the standard quantity of raw material is 10 Kg
For 500 units of actual production, how much would be the standard quantity of raw materials?
SQAO = 10 Kg × 500 Units = 5000 Kg,
Standard Price = ` 6 Kg

AQ = 5500 Kgs,
Actual Price = ` 5.5 Kg
Material Cost Variance = SQAO × SP – AQ × AP
= (5000 Kg × ` 6) – (5500 Kg × ` 5.5)
= (` 30000) – (` 30250) = (` 250))(A)

Material Price Variance = (SP – AP) × AQ
= (` 6 – ` 5.5) × 5500 = ` 2750(F)
Material Usage Variance = (SQAO – AQ) × SP
= (5000 – 5500) × ` 6= ` 3000 (A)

Verifi cation: The indirect method of computing the material cost variance facilitates to verify the
answer computed under the material variances.

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