Standard Costing: Material Variances

To compute all the material variances, we will use the following notations:
A = Standard quantity of material required for actual production x Standard Rate
B = Standard proportion of actual material used (total) x Standard Rate
C= Actual material used (individual) x Standard Rate
D= Actual material used (individual) x Actual Rate

Problem 1:
X Ltd. is engaged in producing a standard mix using 60 kg of chemical x and 40 kg of
chemical y. The standard loss of production is 30%. The standard rate of x is Rs. 5
and of y is Rs. 10 per kg.
The actual mix and yield were as follows:
x: 80 kg @ Rs. 4.50 per kg
y: 70 kg @ Rs. 8 per kg.
Actual yield 115 kg.
Calculate all material cost variances.

Solution:
First we arrange the information in the following manner:

Material Standard Actual

Quantity Rate Quantity Rate
x 60 5 80 4.5
y 40 10 70 8
Material used 100 150
Less, Normal Loss 30 (30% of100) 35 (Bal. fig)
Output 70 115

Computation of Material variances:

Let, A = Standard quantity of material required for actual production x Standard Rate

[Explanation: here standard output is 70 kg and actual output is 115 kg. For the
production of 70kg in standard, material x is required 60 kg and material y is required
40 kg. So, in terms of standard, for production of 1 unit of product, material x is
required (60/70) kg and material y is needed (40/70) kg. Now we have to determine
the requirement of materials for actual production of 115 kg.]

A=

Total of A = Rs.(492.85 + 657.15) = Rs. 1150

B = Standard proportion of actual material used (total) x Standard Rate

[Explanation: Here standard proportion is 60:40 = 3:2. Total actual material used
is 150 k.g]
B =

Total of B = Rs. 1050 (450 +600)

C= Actual material used (individual) x Standard Rate

[Explanation: here we have to consider individual actual usage of each material. Here
we have to use standard rate]

C=
Total of C = Rs. 1100

D= Actual material used (individual) x Actual Rate

[ use actual material used for each case and multiply by actual rate]

D=
Total of D = Rs. 920

After computing A, B, C and D, now you can compute all the variances. We have to
find out whether the variance is favourable or adverse. If the actual cost is less than
the standard cost, the variance is favourable, otherwise it is adverse. A look into the
notations used indicates that A is in terms of standard and D is in terms of Actual. So,
if A>D, this means standard cost is more than actual cost. Thus the variance is
favourable. This implies that for all the cases positive sign is favourable (F) and
negative sign is adverse (A) as gradually we move from standard to actual (from A to
D).

Material yield variance = A –B = Rs. (1150 – 1050) = Rs. 100 (F)

Material mix variance = B – C = Rs. (1050 – 1100) = Rs. 50 (A)
Material usage variance = A – C = Rs. (1150 – 1100) = Rs. 50 (F)
Material price variance = C – D = Rs. (1100 – 920) = Rs. 180 (F)
Material cost variance = A – D = Rs. (1150 – 920) = Rs. 230 (F)

Check: Material usage variance = material yield variance + material mix variance =
100 (F) + 50 (A) = 50 (A).
Material cost variance = Material usage variance + material price variance = 50 (F) +
180 (F) = 230 (F).

Prob. 2: A standard materials cost to produce a ton of chemical X is:

300 kg of material A @ Rs. 10 per kg
400 kg of material B @ Rs. 5 per kg
500 Kg of Material C @ Rs. 6 per kg
During a period 100 tons of product X is prepared from the usage of:
25 tons of material A at a cost of Rs. 9000 per ton
42 tons of material B at a cost of Rs. 6000 per ton
53 tons of material C at a cost of Rs. 7000 per ton
Calculate all material variances.
Solution:
Workings:
Actual output = 100 tons = 100,000 kg; Standard output = 1 ton = 1000 kg
Actual material used (in kg.): A = 25 x 1000 = 25000 kg; B = 42 x1000 = 42000 kg
and C = 53 x1000 = 53000 kg
Calculation of actual rate:
Material A = Rs. 9000/1000 kg = Rs. 9 per kg; Material B Rs. 6 per kg and material C
Rs. 7 per kg.

Standard and actual information

Material Standard Actual
Quantity Rate Quantity Rate
A 300 10 35000 9
B 400 5 42000 6
C 500 6 53000 7
Material used 1200 130000
Output 1000 100000

A = Standard quantity of material required for actual production x Standard rate

= A: (300/1000) x 100000 x 10 = 300000
B: (400/1000) x 100000 x 5 = 200000
C: (500/1000)x 100000 x 6 = 300000
8,00,000

B = Standard proportion of actual material used (total) x Standard Rate

Here standard proportion = 3:4:5
= A: (3/12) x 130000 x 10 = 325000
B : (4/12) x 130000 x 5 = 216667
C: (5/12) x 130000 x 6 = 325000
8,66,667
C= Actual material used (individual) x Standard Rate
= A: 35000 x 10 = 350000
B : 42000 x 5 = 210000
C : 53000 x 6 = 318000
878000

D = Actual material used (individual) x Actual Rate

= A: 35000 x 9 = 315000
B: 42000 x 6 = 252000
C: 53000 x 7 = 371000
938000

Material yield variance = A –B = Rs. (800000 - 866667) = Rs. 66667 (A)

Material mix variance = B – C = Rs. (866667 - 878000) = Rs. 11,333 (A)
Material usage variance = A – C = Rs. (800000 - 878000) = Rs. 78000 (A)
Material price variance = C – D = Rs. (878000 - 938000) = Rs. 60000 (A)
Material cost variance = A – D = Rs. (800000 - 938000) = Rs. 138000 (A)