Illustration
Universal Chemical Industry produces a chemical by blending two basic raw materials. It operates a standard costing system and the following standards have been set for raw materials:
Standard Data
Materials .................................Quantity.........................Rate
Material A....................................40%..........................$30
Material B....................................60%..........................$40
The standard loss during its processing is expected to be 15%
During the month of April, 2010 the company produced 1,700 kgs. of chemical
Actual data for the period were:
Actual Data
Materials.................................Quantity............................Rate
Material A ...............................830 kg.................................$ 25
Material B................................1,190 kg................................$ 42.5
Please calculate the following variances:
a) Material cost variance
b) Material price variance
c) Material usage variance
d) Material mix variance
e) Material yield variance
f) Verify your results
Calculation:
Computation of revised standard quantity
Formula for revised standard quantity = SQ/SO xAO
Where, SQ = Standard quantity, SO = Standard output, AO = Actual Output
= 40+60/100-15 x 1,700 = 2,000 kgs.
Revised standard quantity for material A = 40% of 2,000 = 800 Kg.
Revised standard quantity of material B = 60% of 2,000 = 1,200 kg.
a) Material cost variance (MCV) = (SQ x SP) - (AQ x AP)
Material A = (800 x 30) - (830 x 25) = 24,000-20,750 = $ 3,250(F)
Material B = (1,200 x 40) - (1,190 x 42.5) = 48,000-50,575 = $ 2,575(U)
Total Material cost variance = 3,250- 2.575 = $ 675(F)
b) Material price variance(MPV) = AQ x (SP -AP)
Material A = 830(30-25) = 830 x 5 = $ 4,150 (F)
Material B = 1,190(40-42.5) = 1,190 x2.5 = $ 2,975 (U)
Total material price variance = 4,150-2,975 = $ 1,175 (F)
c) Material Usage variance(MUV) = SP x (SQ-AQ)
Material A = 30 x(800-830) = 30 x 30 = $ 900 (U)
Material B = 40 x(1,200- 1190) = 40 x 10 = $ 400 (F)
Total material usage variance For material A and B = 900-400 = 500(U)
d)Material Mix variance(MMV)= SP x(Act. mix/Std. mix ) x SQ - (AQ)
Material A = 30 x(2,020/2,000) x 800 - 830 = 30 x (808-830) = $660(U)
Material B = 40 x (2,020/2,000) x 1,200 - 1,190 = 40 x(1,212-1,190 = $880(F)
Total material mix variance = $220 (F)
e) Material yield variance (MYV) = (AY - SY) x SC
Total material yield variance = (1,700 - 1,717) x 42.35 = $ 720 (U)
Working Notes:
Standard output for actual input = Actual input-Standard loss =2,020-15% of 2,020=1,717
Standard cost per unit of Actual output = Total standard cost/Actual output
= (800 x30 + 1200 x 40)/1700 = (24000 + 48000)/1700 = $42.35 per kg.
f) Verification:
Material cost variance = Material price variance + Material usage variance
= $1,175(F)+$500(U) = $675(F)
Material usage variance = Material mix variance+Material yield variance
= $220(F)+$720(U) = $ 500 (U)
Material cost variance = Material price variance + Material mix variance + Material yield variance = 1,175(F)+220(F)+720(U) = $675(F)
