© Material Variances . ri a‘ : Material Cost Variance In case of materials, the following may be the variances : (a) : | : - 3 (b) Material Price Variance ; (c) Material Usage or Quantity Variance ; (d) Material Mix Variance ; (e) Material Yield Variance. Following chart shows the division and sub-division of material variances : Material Cost Variance Material Price Variance Material Usage (or Quantity) Variance Material Mix Material Yield Variance Variance Now, we proceed to define these variances one by one. (a) Material Cost Variance (MCV). It is the difference between the standard cost of materials allowed (as per standards laid down) for the output achieved and the actual cost of materials used. Thus, it may be expressed as :—_e Material Cost Variance = Standard Cost of Materials for Actual Output ~ Actual Cost of Materials Used or Material Cost Variance = Material Price Variance + Material Usage or Quantity Variance jal Price Variance + Material Mix Variance Material Cost Variance = Materi + Material Yield Variance. Or In order to calculate material cost variance, it is necessary to know: Standard quantity of materials which should have been required (as per standards set) to produce actual output. Thus, standard quantity of materials is : ‘Actual Output x Standard Quantity of Materials per unit. -d quantity of materials specified, actual output (and not Note. In order to find out standar standard output) is to be multiplied by standard quantity of materials per unit. 2, Standard price per unit of materials. 3. Actual quantity of materials used. 4. Actual price per unit of materials. (b) Material Price Variance (MPV). which is due to the difference between the standard output achieved and the actual price of materials used. as: Material Price Variance : Actual Usage (Standard Unit Price — Actual Unit Price). Here, Actual Usage = Actual quantity of material (in units) used’ Standard Unit Price = Standard price of material per unit ‘Actual Unit Price = Actual price of material per unit. (c) Material Usage (or Quantity) Variance (MQV). It is that portion of the material cost variance which is due to the difference between the standard quantity of materials specified for the actual output and the actual quantity of materials used. It may be expressed as : L It is that portion of the material cost variance price of materials used for the In other words, it can be expressed Material Usage Variance : Standard Price per unit (Standard Quantity - Actual Quantity). Note. Standard quantity means quantity of material which should have been used (as per standard determined) for the actual output achieved.<= Z0,UUU AUVerse =< 20,UUU AuVveETSeY. ILLUSTRATION 2 From the following particulars calculate : () Total Material Co. St Variance; (ii) Material Price Variance ; and (¢ii) Material Usage Variance. Standard Actual Materials Price (7) Units Price (2) A 1.0 1,080 12 B 1.5 380 18 2.0 380 19Material Standard Cost Price (#) Actual Cost Total (7) Price (7) 120 18 1.9 _ Totay A B c (i) Material Cost Variance Standard Cost of Materials — Actual Cost of Materials or St. Quantity x St. Unit Cost — Actual Quantity x Actual Unit Cost. -. Materials Cost Variance = % 2,325 — 2,702 = = 377 Adverse. (ii) Material Price Variance Actual Quantity (St. Unit Price — Actual Unit Price) Materials A : 1,080 Units (= 1 — = 1.20) =. % 216 Adverse Materials B : 380 Units (= 1.5 — = 1.80) =? 114 Adverse Materials C : 380 Units (= 2.0 — % 1.90) st 38 Favourable Total Material Price Variance = & 292 Adverse (ii) Material Usage Variance St. Price Per Unit (St. Quantity — Actual Quantity) Materials A : 1 (1,010 Units - 1,080 Units) = ® 70 Adverse Materials B : = 1.5 (410 Units — 380 Units) = % 45 Favourable Materials C : % 2 (350 Units - 380 Units) = ® 60 Adverse Total Material Usage Variance = 85 Adverse Verification Materials Cost Variance = Material Price Variance + Material Usage Variance = 377 Adverse = — = 292 — % 85 == 377 Adverse.ILLUSTRATION 3 From the following information, calculate the materials mix variance. Actual Materials Standard A 200 units @ % 12 160 Units @ % 13 B 100 units @ 7 10 140 units @ 7 10 Due to shortage of material A, it was decided to reduce consumption of A by 15% and increase that of material B by 30%. SOLUTION Revised Standard Mix is : Material A : 200 units — 15% of 200 = 170 units B : 100 units + 30% of 100 = 130 units Materials Mix Variance : Standard Unit Cost (Revised Standard Quantity — Actual Quantity) Material A : % 12 (170 units — 160 units) = 120 Favourable Material B: % 10 (130 units — 140 units) =% 100 Adverse Materials Mix Variance =% 20 Favourable (i) When actual weight of mix differs from the standard weight of mix. \n such a case, material mix variance is calculated as follows : Total Weight of Actual Mix_ ; . , (ra Weight of (Revised) St. Mix x St. Cost of (Revised) St. Mix | — St. Cost of Actual Mix This formula is necessitated to adjust the total weight of standard mix to the total weight of actual mix which is more or less than the weight of standard mix. The above formula can also be written as follows : MMV = Standard Cost of Revised Standard Mix — Standard Cost of Actual MixMaterial Cost tee gee Price (2) 12 1.8 19 —_—————_— Total (7) 1,296 684 722 2,702 ————— Standard . : Actual 200 units @z12 160 Units @7 13 100 units @ = 10 140 units @ 10 Materials A B Due to shortage of material A, it was decided to reduce consumption of A by 15% and increase that of material B by 30%. UTION Revised Standard Mix is : Material A : 200 units — 15% of 200 = 170 units B : 100 units + 30% of 100 = 130 units Materials Mix Variance : Standard Unit Cost (Revised Standard Quantity — Actual Quantity) Material A : % 12 (170 units — 160 units) = 120 Favourable Material B : € 10 (130 units — 140 units) =% 100 Adverse Materials ix Variance =% 20 Favourable (i) When actual weight of mix differs from the standard weight of mix. In such a case, material mix variance is calculated as follows : [ Total Weight of Actual Mix__ s+. cost of (Revised) St. Mix | - St. Cost of Actual Mix lard mix to the total weight of actual Total Weight of (Revised) St. Mix This formula is necessitated to adjust the total weight of stand: mix which is more or less than the weight of standard mix. The above formula can also be written as follows : MMV = Standard Cost of Revised Standard Mix — Standard Cost of Actual Mix calculate all materials variances. ILLUSTRATION 4 From the data given below, eRe i ee a aILLUSTRATION 6 From the following data, calculate material yield variance : Standard Mix Actual Mix Material A 60 units costing = 3,000 300 units costing = 15,300 Material B 40 units costing = 1,200 200 units costing = 5,600 Standard loss allowed is 10% of input and standard rate of scrap realisation is = 6 per unit. Actual output is 440 units. SOLUTION Standard Mix Actual Mix Units Amount Units Material A 60 = 3,000 300 Material B 40 = 1,200 200 100 = 4,200 500 Less : Loss 10% 10 = 60 60 (Scrap of 10 units @ = 6 per unit) Output 90 = 4,140 440 % 4,140 Standard cost per unit = 00 = 46 Yield Variance _= St. Cost per unit (Actual Yield — St. Yield) = = 46 (440 units — 450 units) = % 460 Adverse Standard Yield = Actual Material Mix — 10% of Actual Material Mix = (300 units of A + 200 units of B) — 2 x 500 = 500 — 50 = 450 units.© Labour Variances Labour variances can be analysed as follows : (a) Labour Cost Variance (LCV) ; (b) Labour Rate (of Pay) Variance (LRV) ; (c) Total Labour Efficiency Variance (TLEV) Or Labour Efficiency Variance Unadjusted ; (d) Labour Efficiency Variance (LEV) ; (e) Labour Idle Time Variance (LITV) ; (f) Labour Mix Variance or Gang Composition Variance (LMV or GCV) ; (g) Labour Yield Variance or Labour Efficiency Sub- variance. (LYV or LESV) ; (A) Substitution Variance. These variances are like material variances and can be defined as follows : (a) Labour Cost Variance. It is the difference between the standard cost of labour allowed (as per standard laid down) for the actual output achieved and the actual cost of labour employed. It is also known as wages variance. This variance is expressed as :Labour Cost Variance = Standard Cost of Labour — Actual Cost of Labour. (6) Labour Rate (of Pay) Variance. It is that portion of the labour cost variance which arises due to the difference between the standard rate specified and the actual rate paid. It is calculated as follows : Rate of Pay Variance = Actual Time Taken (Standard Rate — Actual Rate). (c) Total Labour Efficiency Variance. It is that part of labour cost variance which arises due to the difference between standard labour cost of standard time for actual output and standard cost of actual time paid for. It is calculated as follows : Total Labour Efficiency Variance (TLEV) = Standard Rate (Standard Time for Actual Output — Actual Time paid for) Total labour efficiency variance is calculated only when there is abnormal idle time. (d) Labour Efficiency Variance. It is that portion of labour cost variance which arises due to the difference between the standard labour hours specified for the output achieved and the actual labour hours spent. It is expressed as : Labour Efficiency Variance = Standard Rate (Standard Time for Actual output — Actual Time Worked). Here standard time for actual output means time which should be allowed for the actual output achieved. Actual Time worked means actual labour hours spent minus abnormal idle hours.ILLUSTRA’ TION 15° Calculate variances from the following data Number of men employed Standard Actual Output in units 100 90 Number of working days in a month et 4800 18 = 200 7198 Average wages per man per month SOLUTION First, we cé e calculate standard rate, actual rate, standard time and actual time which are not directly given in the question. Standard wages per man per month = = 200 Standard working days in a month = 20 Standard rate per day == 300 =710 Actual wages per man per month = = 198 Actual working days in a month = 18 Actual rate per day = = 8 =F Standard man days for an output of 5,000 ul Standard man days for the actual outputof 4,800 units = 7 2008 = 1,620 man days. nits = 100 x - i 000 man days x 4,800 = 1,920 mandays. Actual man days = men x working days = 90 x 18 = (a) Labour Cost Variance Labour Cost Variance = Standard Cost of Labour — Actual Cost of Labour. For. 5,000 units Standard cost of labour = 100 workers @ & 200 = = 20,000. 20.000 , 4,900 = ¢ 19,200 -. For the actual output of 4,800 units, Standard cost of labour = Actual Cost of Labour = 90 workers @ % 198 =% 17,820. . Labour Cost Variance = = 19,200 - % 17,820 == 1,380 Favourable Rate of Pay Variance Actual Time (Standard Rate — Actual Rate) 1,620 Unfavourable 4.620 man days (= 10-2 11) = (b)(c) Labour Efficiency Variance Standard Rate (Standard Time — Actual time) @ 10 (1,920 man days — 1,620 man days) = = 3,000 Favourable (e) Labour Idle Time Variance. In Standard costing, standard labour time is fixed taking into account the normal idle time. However, if the actual time is more than this normal time it jg considered as abnormal idle time. This variance is calculated only when there is abnormal idle time. It is that portion of labour cost variance which is due to the abnormal idle time of workers, This variance is shown separately to show the effect of abnormal causes affecting production like power failure, breakdown of machinery, shortage of materials etc. While calculating labour efficiency variance, abnormal idle time is deducted from actual time expended to ascertain the real efficiency of the workers. Labour idle time variance is expressed as : Idle Time Variance = Abnormal Idle Time x Standard Rate Or Idle Time Variance = St. Rate (Actual Hours Worked — Actual Hours Paid) Total Labour Cost Variance = Labour Rate of Pay Variance + Total Labour Efficiency Variance Total Labour Efficiency Variance = Labour Efficiency Variance + Labour Idle Time VarianceILLUSTRATION 17 The standard output of ‘X’ is 25 units per hour in a manufacturing department of a company employing 100 workers. The standard wage rate per labour hour is 6. In a 42 hour week, the department produced 1,040 units of X despite the loss of 5% of the time paid due to abnormal reason. The hourly rates actually paid were = 6.20, = 6 and = 5.70 respectively to 10, 30 and 60 workers. Compute relevant variances.SOLUTION Basic Calculations Standard output of 100 workers working for one hour in a manufacturing department is 26 un! St. time peru 100 hours 25 units 4 hours St. time for actual output of 1,040 units @ 4 hours = 4,160 hours St. labour cost of actual output cost. rate of & 6 = 4,160 x 7 6 = 7 24,960 CALCULATION OF ACTUAL LABOUR COST its. Rate per | _ Actual No. of | Hours | Actual hours | Idle hours paid | Effective workers | per week paid @ 5% of time hours hour Labour Cost eee paid Q) (2) (3) = (1) x (2) | (4) =5% of (3) | (5) = (3) (4) (6) (7) = (3) (6) 10 42 420 24 399 6.20 2,604 30 42 1,260 63 4,197 6.00 7,560 60 42 2,520 126 2,394 5.70 14,364 Total 4,200 210 3,990 24,528 Calculation of Variances Labour Rate Variance = Actual Time (St. Rate ~ Actual Rate) For 10 Workers For 30 Workers For 60 Workers Total Labour Rate Variance 1 wow 120 (% 6 - & 6.20) 260 (* 6-% 6) 520 (* 6-F 5.7 Total Labour Efficiency Variance = St. Rate (St. Time for Actual Output — Actual Time Paid) = & 6 (4,160 hours — 4,200 hours) = @ 240 Adverse Labour Efficiency Variance = St. Rate (St. Time for Actual Output - Actual Time Worked) = 7 6 (4,160 hours ~ 3,990 hours) = % 1,020 Fav. Idle Time Variance = St. Rate (Actual Hours Worked ~ Actual Hours Paid) = % 6 (3,990 - 4,200) = @ 1,260 Adverse Labour Cost Variance = St. Labour Cost ~ Actual Labour Cost = ¥ 24,960 - 7 24,528 = % 432 Fav. Nil = 84 Adverse 0) = % 756 Fav. % 672 Fav.