Page 122 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 7: Variance Analysis

Solution: Notes

First step is to find out the standard quantity for actual output
Standard quantity of raw materials = 2 Kg
Actual Production = 400 units
To have leveled comparison, the Standard quantity of materials for actual output to computed;
then only the variance intend to encircle will be meaningful or vice versa.
The computation of SQAO should be computed at fi rst:
For the production of one unit of product 2 Kg of raw material was planned and fi nalized prior

to the commencement of production process. The actual production of the firm during the cycle

is 400 units. What would be the requirement of the firm in manufacturing 400 units to the tune of
planned quantity of materials per unit 2 Kg? This is the standard quantity of materials for actual
output computed for an effective comparison with the actual quantity of materials consumed by

the firm in manufacturing the 400 units.
SQAO = 400 × 2Kg = 800 Kg
SP = Standard Price = ` 2 per Kg
AQ = Actual Quantity = 850 Kgs
AP = Actual Price = ` 1.80
Material cost variance = (SQAO × SP) – (AQ × AP)

= (800 Kg × ` 2) – (850 Kg × ` 1.8)
= ` 1600 – ` 1530
= ` 70 (F)
The material cost variance of the above problem is favourable due to lesser actual cost over the
standard cost of materials.

Material Price Variance

It is very simple to understand that the name of the variance is self-explanatory in explaining
the meaning of the variance. It is a variance in between two different prices viz. the standard
price and actual price of raw materials. The difference should be expressed only in terms of the
actual usage of materials. The ultimate of aim of expressing this variance in the lights of actual
usage of materials is to identify the deviation of the price changes in line with the purchase of
raw materials.
Material Price Variance = (SP – AP) AQ
From the earlier illustration, the material price variance is as follows

Standard price = ` 2 per unit
Actual price = ` 1.80 per unit
Actual quantity of materials consumed = 850 Kg
Material price variance = 850 Kg (2.00 – 1.80)

Material price variance = `170 (F)
Decision Criterion: If the resultant is positive, it means that the planned price which was
scientifi cally developed is more than the actual price. In precise terms, the price fl uctuations in

the market are well with in the planned price. If it is within the standard, quantified as favourable

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