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Lesson-26

Material Cost Variance Analysis

Learning Objectives

• To know how to calculate material cost variance

• To know how to calculate material usage variance
• To know how to calculate material price variance

Terminology for Material Variance Calculation

• SQ =Standard Quantity
• SR = Standard Rate
• AQ = Actual Quantity
• AP = Actual Price
• RSQ = Resaved STD Quantity
• MCV = Material Cost Variance
• MUV = Material Usage Variance
• MPV = Material Price Variance
• MMV = Material Mix Variance
• MYV = Material Yield Variance

Problem 1

The following information is obtained from X Co. Ltd.

Product SQ SP AQ AP
(Units) (Rs.) (Units) (Rs.)

A 1050 2.00 1100 2.25

B 1500 3.25 1400 3.50
C 2100 3.50 2000 3.75

Calculate the following:

• Material cost variance

• Material price variance
• Material usage variance

Solution

1. MCV = (SQ x SR) – (AQ x AR)

A = (1050 x 2.00) – (1100 x 2.25)

= 2100 – 2475 = Rs. 375 (A)

B = (1500 x 3.25) – (1400 x 3.50)

= 4875 – 4900 = 25 (A)

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C = (2100 x 3.50) – (2000 x 7.25)

= 7350 – 7500 = 150 (A)

--------------------
550 A
--------------------

2. MPV = AQ (SP-AP)

A = 1100(2.00 – 2.25) = 1100 x (0.25) = Rs. 275 (A)

B = 1400(3.25 – 3.50) = 1400 x (-0.25) = Rs. 350 (A)

C = 2000(3.50 – 3.75) = 2000 x (-0.25) = Rs. 500 (A)

-----------------
1125 A
-----------------

3. MUV = SP (SQ-AQ)

A = 2 (1050 -1100) = 2 (-50) = Rs. 100 (A)

B = 3.25 (1500 – 1400) = 3.25 (100) = Rs. 325 (F)

C = 3.50 (2100 - 2000) = 3.50 (100) = Rs. 350 (F)

---------------
575 (F)
---------------
Verification

MCV = MPV + MUV

Rs. 550 (A) = 1125(A) + 575 F
550 (A) = 550 (A)

Problem 2

Product SQ SP Total AQ AP Total

A 10 2 20 5 3 15

B 20 3 60 10 6 60

C 20 6 120 15 5 75
--- ----- --- -----
Total 50 200 30 150
--- ----- --- -----

Find out (1) MCV (2) MPV (3) MMV (4) MUV

Sol.: (1) MCV = (SQ x SR) – (AQ x AR)

A = (10 x 2) – (5 x 3) = 5F

B = (20 x 3) – (10 x 6) = Nil

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C = (20 x 6) – (15 x 5) = 45 F
------
TOTAL = 50 F
------
(2) MPV = (SP – AP) AQ

A = (2 - 3) 5 = 5A

B = (3 - 6) 10 = 30 A

C = (6 - 5) 15 = 15 F
--------
TOTAL = 20 (A)

(3) MMV = (RSQ – AQ) SP

In this total std. mix and total actual mix is difference in proportion. Now you should calculated
revised STD’s.

MMV = (RSQ – AQ) TAQ

RSQ = SQ
---- x TAQ
TSQ

10
A = ---- x 30 = 6
50

20
B = ---- x 30 = 12
50

20
C = ---- x 30 = 12
50

Now MMV

A = (6-5) x 2 = 2F

B = (12-10) x 3 = 6F

C = (12-15) x 6 = 18 A
--------
10 (A)
--------

(4) MUV = (SQ – AQ) SP

A = (10 – 5) x 2 = 10 F
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B = (20 – 10) x 3 = 30 F

C = (20 – 15) x 6 = 30 F
------
70 F
------

Verification

MCV = MPV + MUV

50 F = 20 A + 70 (F)

50 F = 50 F

Problem 3
Standards Actuals

Material Qty Price Total Qty Price Total

Kg. Rs. Rs. Kgs. Rs. Rs.

P 500 6.00 3.000 400 6.00 2400

Q 400 3.75 1500 500 3.60 1800

R 300 3.00 900 400 2.80 1120

------ ------
1200 1300
------ ------
Less 10%
Normal Loss 120 Actual Loss 220
------- ------ ------ ------
1080 5400 1080 5320
------- ------ ------ ------

Calculate (1) Material cost value (2) Material price value

(3) Material mix value (4) Material usage value
(5) Material yield value.

Solution

1. MCV = (SQ x SR) - (AQ x AR)

P = (500 x 6) - (400 x 6) = Rs. 600 (F)
Q = (400 x 3.75) - (500 x 3.60) = 300 (A)
R = (300 x 3) - (400 x 2.80) = 220 (A)
---------------
Total MCV = 80 (F)
---------------

2. MPV = (SP –AP) AQ

P = (6 -6) 400 = Nil

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Q = (3.75 – 3.60) 500 = 75 (F)

R = (3 – 2.80) 400 = 80 (F)

---------
Total MPV = 155 F
--------

3. Material Mix Value = (RSQ – AQ) SR

For Calculation Mix Value we need to revise the Revised Standards

SQ
RSQ = ---- x TAQ
TSQ

500
P = ----- x 1300 = 541.67 kgs
1200

Q = 400
----- x 1308 = 433.33 kgs
1200

R = 300
----- x 1300 = 325 kgs
1200

MMV
P= (541.67- 400) 6 = 850 F

Q= (433.33 – 500) 3.75 = 250 (A)

C = (325 - 400) 3 = 225 A

----------
Total MMV = 375 (F)

Material Yield Variance (MYV)

You may observe in the standard quantity and normal loss the actual input and actual output. Since
the actual output is different, you calculate as follows.

MYV = (Std. loss - Actual loss) Avg. Std. price

Total Std. cost

Avg. Std. Price = ----------------------
Total Std. output

5400
= --------- = 5 Per Unit
1080

MYV = (130 - 220) 5 = Rs. 450 (A)

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Problem 4

The standard cost of a certain chemical mixture is

40% Material A at Rs. 200 Per Ton

60% Material B at Rs. 300 Per Ton

A standard loss of 10 % is expected in production. During a period, there is used 90 tons of material
A at the cost of Rs. 180 per ton, 110 tons material B at the cost of Rs. 340 per ton.

Calculate : 1. Material Price Variance

2. Material Mix Variance

3. Material yield Variance.

Solution

Working Notes

Total Actual Quantity = A = 90 Tons

B = 110 Tons
-----------------
200 Tons
-----------------

Standard Quantity is
A= 200 x 40% = 80

B= 200 x 60% = 120

--------
200
---------

Material SQ SP Total AQ AP Total

A 80 200 16,000 90 180 16200

B 120 300 36,000 110 340 37400

------ ------- ----- --------
200 52,000 200 53600

Less: 10%
Normal Loss 20 Actual 18
----- Loss ----
180 182
----- ----

1. Material Price Variance = (SP - AP) AQ

A = (200 – 180) 90 = 1800 F

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B = (300 – 340) 110 = 4400 A

----------
Total MPV = 2600 (A)

2. Material Mix Variance = (RSQ – AQ) AP

RSQ = SR
---- x TAQ
TSQ

A = 80
---- x 200 = 80
200

B = 120
----- x 120 = 120
200

MMV A = (80 – 90) 200 = 2000 (A)

B = (120-110) 300 = 3000 (F)

-----------
1000 (F)
-----------

3. Material Yield Variance = (STD Loss – Actual Loss) Avg. Std. Price

= (20 – 18) x 2.88 = 577 (F)

Total Std Cost

Avg. Std. Price = -------------------
Net Std. Output

52.000
= --------- = 2.88
180

Problem 5

Rai Industries Ltd. produces an article by using two kinds of material. It operates at standard costing
and the following standards have been set for raw materials:

Material Std. Mix STD Price per kg

A 46 % Rs. 4.00
B 60% 3.00

The standard loss in processing is 15%. During April 2003, the company produced net 1700 kgs of
finished product.

The position of stock and purchases for the month of April 2003 is as follows:

Material Stock on Stock on Purchases during Cost

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1-4-2003 30-4-2003 the month

----------- ------------- ------------
A 35 5 800 3400
B 40 50 1200 3000

Calculate the following:

• Material usage variance

• Material price variance
• Material yield variance
• Material mix variance
• Material cost variance

Assume that material is issued on FIFO method. The opening stock was valued on standard price.

Solution

Working Notes

a. Calculation of actual quantity used

Net Actual Product is 1700 kg

It is extent to 85 %

100 % Actual quantity = 1700 x 100 = 2000

------
85

Material used = (Op. Stock + Purchase) - Cl. Stock

A = (95 + 800) - 5 = 830

B = (40 + 1200) - 50 = 1190

Standard Quantity A = 2000 x 40

---- = 830 kgs
100

B = 2000 x 60
---- = 1200 kgs
100

Calculation of Actual Cost of Material used

Material A:
Op. Stock = 35 x 4 (Std. Rate) = 140.00

(+) Purchase = 795 x 4.25 (Actual cost) = 3378.75

------- ----------
830 3518.75
------ ---------
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Mat – A: Actual Cost per unit = 3400

------ = 4.25
800 kgs

Material B Op stock = 40 kgs. @ Rs.3 (Std. Rate) = 120.00

(+) Purchase = 1150 Rs. 2.50 (Actual Rate) = 2875.00

------ -----------
1190 6513.75
------ ----------

Mat – B Actual Rate per unit = 3000

------ = 2.50
1200 kgs

1. MUV = (SQ x SR) - (AC x AR)

A = (830 x 4) - {(35 x 4) + (795 x 4.25)}

3320 - 3518.75 = 198.75 A = 198.75 A

B = (1190 x 3) - {(40 x 3) + (1150 x 2.50)}

3570 - 2995 = 575. F

---------
Total MUV 376.25 (F)
-------------

2. MPV = SR (SQ - AQ)

A = 4 (800 - 830) = 120 (A)
B = 3 (1200 – 1190) = 30 F
---------
Total 90 (A)
---------

3. Material Yield Variance = (Stand. loss – Actual loss) Avg. Std. Price

Avg. Std. Price = A = 800 kgs @ 4 = 3200

B = 1200 kgs @ 3 = 3600

--------
Total Cost 6800
--------

Avg. Std. Price = 6800

------- = 4
2000

Std Loss = Input = 2000

(-) 15% loss = 300
------
Std. output 1700
------
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Actual yield = For 2000 Std. input = 1700

2020 =?

1700
------ x 2020 = 1717
2000

Actual input = 2000

(-) Actual production = 1717
------
Actual loss = 283
------
Material Yield Variance = (300-283) 4 = 68(A)