Page 231 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes Verification: The indirect method of computing the material cost variance facilitates to verify
the answer computed under the material variances.
MCV = MPV + MUV

250 (A) = 2750 (F)+ 3000 (A)
L.H.S = R.H.S

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 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

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