Page 232 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 11: Variance Analysis

comparing the standard with actual, the earlier is not at par with later in terms of realities. Notes
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:

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)

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