Page 178 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 9: Variance Analysis

(iii) Material Usage Variance = (SQ – AQ) SP Notes

= (2,000 – 2,200) 5 = ` 1,000 Adverse
3. The standard quantity and standard price of raw material required for one unit of product
A are given below:
Quantity Standard Price

Material X 2 kgs. ` 3 per kg.
Material Y 4 kgs. ` 2 per kg.
The actual production and relevant data are as follows:
Output 500 units of product A
Material Total Quantity Total Cost
for 500 units (`)
X 1,200 kg. 3,900
Y 1,800 kg. 4,500
Calculate Cost, Price and Usage Variances.
Solution:
1. Material Cost Variance = (SQ × SP) - (AQ × AP)
SQ refers to standard quantity for actual production
For one unit of product A, Material X = 2 kgs.
For 500 units of product A, Material X = 500 × 2 = 1000 kgs
For one unit of product A, Material Y = 4 kgs.
For 500 units of product A, Material Y = 500 × 4 = 2000 kgs.

Material Cost Variance:
Material X: (1,000 × 3) - 3,900 = ` 900 Adverse
Material Y: (2,000 × 2) - 4,500 = ` 500 Adverse
2. Material Price Variance = (SP - AP) AQ
Material X: (3 - 3.25) 1,200 = ` 300 Adverse
Material Y: (2 - 2.50) 1,800 = ` 900 Adverse
3. Material Usage Variance = (SQ - AQ) AP
Material X: (1,000 - 1,200) 3 = ` 600 Adverse
Material Y: (2,000 - 1,800) 2 = ` 400 Favorable

Note AP = X = 3900 + 1200 = 3.25; Y = 4500 + 1800 = 2.50

9.2.2 Labour Variances

Labour Variance is known in other words as Labour Cost Variance. The cost of the labour is usually
denominated by the wages paid/incurred during the production. Labour Variance Analysis, is
studying the deviation in between the actual cost of the labour incurred and standard/budgeted
cost of the labour. This is another most important cost variance, next to material cost variance,

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