COVENANT UNIVERSITY

COLLEGE OF BUSINESS AND SOCIAL SCIENCES

DEPARTMENT OF ACCOUNTING
WEEK 8

COURSE CODE: ACC423

STANDARD COSTING 2:

The basic material variances we have discussed in ACC322 do not represent the conclusion of
the whole matter bothering on material variances. In certain circumstances, it is conventional
for sub-variances to be calculated, known as the Direct Material mix Variance and the direct
material yield variance.

Typical circumstances under which such calculations are considered appropriate are those
where the production process involves mixing different material inputs to make the required
output. E.g. the manufacturing of fertilizers, steel, plastic, food drinks etc.

MATERIAL MIX VARIANCE:

A mix variance occurs when the materials are not mixed or blended in standard proportions
and it reveals whether the actual mix is cheaper or more expensive than the standard mix. If a
greater proportion of cheaper materials is used in the blend, there will be favourable mix
variance, whereas if a greater proportions of the more expensive materials is used, there will be
an adverse mix variance.

MATERIAL YIELD VARIANCE:

The material yield variance arises because there is a difference between what the standard
output should be for a given level of input and the actual output attained. The direct materials
yield variance expressed in value, the difference between the expected ( or standard) yield
from an input mix and the actual yield from mix.
Illustration 1:

The budgeted and standard data for a product include the following:

Direct Labour

Ten employees work a 45 hour week.

Standard rate of pay is N4 per hour.

Output per hour is 40kg of product.

Direct Materials:

Materials Quantity (Kg) Price per Kg. (N)

X 60 2.00

Y 40 1.00

Z 100 1.40

From this standard Mix, 180 Kg of product are expected.

Actual data for the first week in March were as follows:

Hours worked 45 hrs

Rate of pay N4 per hours

Overhead incurred N5, 400

Output 1,980 Kg

Production and consumption of materials were as follows:

Materials Quantity (Kg) Price per Kg. (N)

X 700 1.80

Y 440 1.10

Z 1,120 1.30
Required:

Calculate the following variances for each material:

a) Direct Material -- Total

b) Direct Material -- Price
c) Direct Material -- Usage
d) Direct Material -- Mix
e) Direct Material -- Yield

SOLUTION:

Standard Cost Card:

Materials:

60/180 N

X 0.3333 KG @ N2/kg = o.6666

40/180

Y 0.2222KG @ N1/kg = 0.2222

100/180

Z 0.5555 KG @ N1.40/kg = 0.7777

a) MATERIAL COST VARIANCE:

MATERIALS ACTUAL MATERIAL STANDARD MATERIAL VARIANCE

COST COST

N N

X 1,260 [ 0.6666 X 1980] = 1,320 60 F

Y 484 [ 0.2222 X 1980] = 440 44 A

Z 1,456 [ 0.7777 X 1980] = 1,540 84 F

100F
 b) MATERIAL PRICE VARIANCE:

Materials Actual Qty@ Actual Actual Qty @ Std Material Variance

Material price Price

X 1,260 [ 700 X N2] = 1,400 140 F

Y 484 [440 x N 1] = 440 44 A

Z 1,456 [1,120 X N1.40] = 1,568 112 F

208 F

c) MATERIAL USAGE VARIANCE:

MATERIALS Actual Materials Std. Material Qty Diff. Std Material Variance

Consumed Kg Allowed (Kg) (Kg) Price (N)

X 700 [ 0.3333 X 1980] = 660 (40) 2 80 A

Y 440 [ 0.2222 X 1980] = 440 -- 1 --

Z 1,120 [ 0.5555 X 1980 ] = 1100 (20) 1.40 28 A

108 A

d) MATERIAL MIX VARIANCE :

Materials Actual Material Std Material Mix Diff Std Material Variance

Mix (Kg) Kg (W1) Kg price (N)

X 700 678 (22) 2 44 A

Y 440 452 12 1 12 F

Z 1120 1130 10 1.40 14 F

18 A
(W.1) Standard Mix Ratio.

X : Y : Z= 60 : 40 : 100

,, ,, = 3 : 2 : 5

X = 3/ 10 X 2,260 = 678

Y = 2/ 10 X 2,260 = 452

Z = 5/ 10 X 2,260 = 1,130

2,260

e) MATERIALS YIELD VARIANCE:

Materials Std Mix (ACT) Std Materials Diff Std Material Variance

( Kg) Allowed (Kg) price N

X 678 660 (18) 2 36 A

Y 452 440 (12) 1 12A

Z 1,130 1,100 (30) 1.40 42 A

90 A

PROBLEMS OF SETTING STANDARDS:

The following are the likely problems to be encountered while attempting to set up variance
analysis:

a) Forecasting errors;
b) Decisions on how to incorporate inflation into planned unit cost.
c) Agreeing on labour efficiency standards (hourly and /or units)
d) Deciding on the quality of materials to be used because better quality materials may
cost more but perhaps reduce material wastage.
e) Deciding on the approximate mix of component material ( where some changes in the
mix is possible, e.g. manufacturing of food and drinks)
f) Estimating material prices where seasonal price variation or bulk purchase discount may
be significant.
CAUSES OF VARIANCES

VARIANCE FAVOURABLE ADVERSE.

1) Material price 1) Unforeseen discount
received.
2) Greater care taken in
purchases.
3) Positive change in
Material Standard
2) Material Usage 1) Material used of
higher quality than
standard,
2) More effective use
made of standards;
3) Positive errors in
allocating materials to
job.
3. Labour Rate 1) Use of apprentice or 1) Wage rate increases
other workers at lower 2) Negative effect of trade
rate of pay than
standard.
2) Allocation of jobs to
higher grade of labour;
3) Negotiated decrease
in wage rate.
4. Idle Time
5) Labour Efficiency 1) Output produce more
quickly than expected.
2) Improved quality of
equipment and
materials.
3) Positive errors in
allocating time to jobs.
4) Better training.
1) Price increases;
2) Careless purchase;
3) Negative change in
material standards
1) Defective materials
2) Excess wastage
3) Thief.
unionism.
1) Machine break down;
2) Non availability of
materials;
3) Illness or injury of
worker
4) Labour dispute /
political instability.
1) Lost time in excess of
standard allowed.
2) Negative errors in
allocating time to jobs.
3) Lac of training and
motivation.
4) Failure to maintain
machine in proper
condition.

6) Overhead Expenditure 1) Savings in cost incurred 1) Increases in cost of services

2) More economic use of used e.g. Telephone,

7. Overhead Efficiency
8) Overhead capacity
services.
3) Positive change in the
service used.
This is the same as overhead
Expenditure.
1) Excess of actual time work
over standards.
2) Capacity over utilisation
Electricity, etc.
2) Excessive use of services.
3) Changes in the type of
services used.
The same with overhead
expenditure.
1) Excessive Idle time
2) Shortage of plant capacity
( capacity Under utilization.)

INVESTIGATION OF VARIANCES:
The following factors must be taking into cognizance while investigating variance:
1) The cost / benefits of such investigation;
2) Inter-dependence of variances;
3) Size of variance in question;
4) Types of standard in operation;
5) The probability of reoccurrence.

PROBLEMS ASSOCIATED WITH INVESTIGATION OF VARIANCES

1) Accuracy in measurement of results;
2) Controllability of variance;
3) Type / nature of standard.
4) Inflation;
5) Governmental policies;
6) Inter- dependence of variances.

HOW TO INVESTIGATE FOR EFFECTIVE CONTROL

1) Managers should participate in setting of standards and in budgeting;
2) Confidence should be established in the reasonableness of the standards and budget;
3) Managers should be educated on controls and value of variances as control information;
4) Tolerance limit for significant deviation should be set;
5) Actual cost should be properly recorded;
6) Variance report should be distributed periodically;
7) Reporting levels should be clearly defined and strictly adhered to
PLANNING AND OPERATIONAL VARIANCE