Page 125 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes
Example: Before the commencement of production process, the standard mix of materials
for the production of one unit of output included two different mixture of quantities of material
viz. A&B amounted 70 tons and 30 tons respectively; which formed the 70% and 30% in the
production of a unit of out put with the current system of material procurement.

Due to shortage of material A, the firm is required to redesign the material procurement system

to have an uninterrupted flow of production of one unit of product. In order to meet out the

shortage of raw material A, the firm should replace the shortage only against the adequate supply

of material B from the market. The firm should restructure the procurement system of material
as follows i.e. 60% of material A and 40% material B. The restructurisation is done only on the
actual but not on the standard. While studying the variance analysis in between the quantity of
materials, standard of 70% of A and 30% of B should be tuned towards the actual 60% of A and
40% of B procured during the process.
Standard Quantity of Materials Actual Quantity of Materials
Material A 70 tons Material A 60 tons
Material B 30 tons Material B 40 tons
Revised standard quantity of material
Actual Material = Standard quantity of Material A/B × Total Quantity
Total Quantity of Standard Material
For A = 70/100 × 100 = 70 tons
For B = 30/100 × 100 = 30 tons
Revised Quantity of Material
Revised quantity of Material A = 70 Tons
Revised quantity of Material B = 30 Tons
From the above, if the total quantity of standard materials is equivalent to actual quantity
of materials, the revised quantity of materials will be as same as the standard quantity of
materials.
When the total standard quantity of materials is not equivalent to total actual quantity of materials
consumed: If the Standard quantity of materials of X and Y are 60 tons and 40 tons respectively.
The actual quantity of materials 90 tons and 60 tons. The total standard quantity of materials and
actual quantity of materials amounted 100 tons and 150 tons respectively.
The revised standard mix of materials of X and Y are as follows:
60
X = × 150 = 90 tons
100
40
Y = × 150 = 60 tons
100
Material Mix Variance = Standard Price (Revised Standard Quantity – Actual Quantity)
From the early discussions, it is clearly understood that the revised standard mix of materials will
be the same only during the moment at which the total actual and standard quantity of materials
are equivalent to each other and vice versa.

Example: From the following information, calculate the materials mix variance
Materials Standard Actuals
A 200 Units @ ` 12 160 Units @ ` 13
B 100 Units @ ` 10 140 Units @ ` 10

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