Page 229 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes Solution:
First step is to find out the standard quantity for actual output
Standard quantity of raw materials = 2Kg
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 first:

For the production of one unit of product 2 Kg of raw material was planned and finalized 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.

11.2.2 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
scientifically developed is more than the actual price. In precise terms, the price fluctuations in

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