Page 230 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 11: Variance Analysis

the market are well with in the planned price. If it is within the standard, quantified as favourable Notes
for a firm. If not, otherwise, the excessive/exorbitant cost of purchase of raw material more than
the standard is unfavourable/adverse for the firm, the reason is the firm has paid more on the
cost towards the purchase of materials than the planned one.

11.2.3 Material Usage or Quantity Variance

The variance/deviation is in between the standard quantity of materials and the actual quantity
of materials consumed. The found variance in Kg of raw materials should be expressed in
monetary values i.e in terms of Rupees, through the multiplication with the standard price. The
ultimate aim of expressing the variance in terms of standard price is the price, which is totally
free from market fluctuations i.e. supply and demand factors of the market.
Materials Usage Variance = Standard Price × (Standard quantity of
materials for actual output – Actual quantity
of materials used)

Example: (Output more than one unit)

Standard quantity of raw materials required to produce one unit of X was 10 kgs @ 6 per Kg
Actual units produced during that period was 500 units. Actual quantity of materials was 5500
Kgs @ 5.5 Kg.

Calculate the material cost, price and usage variance.
Solution:
From the above problem, it came to understand that the actual production of a firm is more than
a unit i.e. 500 units.
Standard quantity of raw materials for actual output has to be computed to the tune of actual
production 500 units

Standard quantity of raw materials foe actual output = Standard Quantity of Materials × Acutal
Production
For One unit of out put the standard quantity of raw material is 10 Kg

For 500 units of actual production, how much would be the standard quantity of raw materials?
SQAO = 10 Kg × 500 Units = 5000 Kg,
Standard Price = 6 Kg
AQ = 5500 Kgs, Actual Price = 5.5 Kg
Material Cost Variance = SQAO × SP – AQ × AP
= (5000 Kg × 6) – (5500 Kg × 5.5)
= ( 30000) – ( 30250) = ( 250) )(A)

Material Price Variance = (SP – AP) × AQ
= ( 6 – 5.5) × 5500 = 2750(F)
Material Usage Variance = (SQAO – AQ)×SP
= (5000 – 5500)× 6= 3000 (A)

LOVELY PROFESSIONAL UNIVERSITY 225