Page 124 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 7: Variance Analysis

Notes

Task If the closing stock of raw materials is given, how the material variance can be
computed?
Standard quantity of materials = 5000 Kgs @ ` 5 per Kg
Actual quantity of materials purchased = 5500 Kgs @ ` 6 per Kg

Closing stock of raw materials = 300 Kgs

Material Mix Variance

This kind of variance arises only due to the mixture of various raw materials to produce and to
get an output. Normally, the process of production involves more than two materials to get the

output. For example the firm mixes the raw materials of A& B at the ratio of 3:2. The mixture is
called Material Mix.
The above mentioned ratio is being changed by the firm for actual production in producing a unit

of product as 4:1.
The change in the material mix due to various reasons, those are following:
1. In adequate supply of raw materials
2. Price factor of a material

3. Introduction of a new system of production due to expansion
4. Substitution of a material due better quality and cheaper price than the existing material in
current system of procurement.

This material mix variance is highly applicable in the following industries that chemicals,
fertilizers, pharmaceuticals, consumables, etc.
The variance should be computed in between two different materials viz. Standard quantity of
materials and Actual quantity of materials.
Actual quantity of materials is the volume of materials registered the change in the usage of raw
materials mixture but the standard quantity of raw materials is totally free from the change of
mixture in the raw materials.
While studying the variance, the factors of comparison should be weighed equally with each
other. For instance, the standard quantity of material should not be a rational factor of comparison
with actual.
!

Caution Why must the standard quantity of raw material be revised?
In order to have an appropriate comparison, the standard has to be revised.
The early estimated standard is the measure not considered the reality during the production
process due to changes occurred in the procurement of raw materials. While comparing the
standard with actual, the earlier is not at par with later in terms of realities. To incorporate
the realities, the standards are tuned towards the actual; makes the comparison meaningful
in studying the variance among the both.
When the total standard quantity of materials is equivalent to Actual quantity of materials: From
the below example, the ultimate aim of revising the standard is explained as follows:

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