Solution » Working Table

Calculations: • Actual Price at which materials are purchased = Actual Total Cost of Materials Purchased Actual Quantity of Material Purchased = Rs. 10,000 4,000 kg = Rs. 2.50/kg Calculation of Value of Materials Consumed: Quantity (kgs) Rate (Rs/kg) Value (Rs.) Opening Stock of Materials 1,000 2.00 2,000 Add: Purchase of Materials 4,000 2.50 10,000 Total Stock 5,000 2.40 12,000 Less: Closing Stock of Materials 2,000 ??? a Value of Material Consumed 3,000 ??? (12,000 − a) Finding the value of materials consumed involves: Finding/Assuming the value of opening stock (if not given). Hide/Show Where the value of opening stock is not given, it can be valued at Current Period Acquisition Price The opening stock is valued at the price at which stock is acquired during the current period. This is resorted to in cases where the stocks are being valued under FIFO, LIFO or Average Methods Standard Price The opening stock is valued at the standard price where standard costing system is being followed, in valuing stocks. Finding the value of closing stock. Hide/Show For finding the value of closing stock the following methods may be adopted: Standard Cost Method Under this method (which is commonly used in cases where standard costing systems are in use), the stocks are always valued at the standard prices. Standard Price of Materials = Rs. 2/kg ⇒ Rate for valuation of Opening Stock as well as Closing Stock = Rs. 2/kg Total Stock 5,000 2.40 12,000 Less: Closing Stock of Materials 2,000 2.00 4,000 Value of Material Consumed 3,000 8 3 8,000 Note: If this method is followed, the price variance indicates the variance on account of purchases during a period and not the usage during the period. The opening stock which forms the closing stock for the previous period is also valued at the Standard Price of the current period. If at all there is any difference between the standard prices of the current and previous periods, it would be accounted for separately. FIFO Method: Stock is assumed to be used on a First In First Out (FIFO) basis. We come across two situations: Closing Stock is less than Current Period Purchases: In such a case, whatever stock remains at the end would be the stock that had been purchased during the current period and is thus valued at the current period purchase price. Total Stock 5,000 2.40 12,000 Less: Closing Stock of Materials 2,000 2.50 5,000 Value of Material Consumed 3,000 7 3 7,000 Closing Stock is more than Current Period Purchases: In such a case, whatever stock remains at the end would contain the total stock purchased during the current period as well as a part of the opening stock and thus the closing stock should be valued by taking the total value of purchases during the current period as well as the value of that part of the stock belonging to the opening stock. Say for example the closing stock is 4,200 kgs. Total Stock 5,000 2.40 12,000 Less: Closing Stock of Materials 4,200 52 21 10,400 Value of Material Consumed 800 2 1,600 Since Closing Stock (4,200 kgs) is more (by 200 kgs) than the stock purchased during the current period (4,000 kgs), Value of closing stock = Value of stock purchased during the current period   + Value of 200 kgs of Opening Stock = (4,000 kgs × Rs. 2.50/kg) + (200 kgs × Rs. 2/kg) = (Rs. 10,000) + (Rs. 400) = Rs. 10,400 LIFO Method: Stock is assumed to be used on a Last In First Out (LIFO) basis. We come across two situations: Closing Stock is less than Opening Stock: In such a case, whatever stock remains at the end would be the stock that forms part of the opening stock. Therefore, it can be valued at the same price at which the opening stock is valued. This is the situation we come across in most of the cases. Say for example the closing stock is 900 units. Total Stock 5,000 2.40 12,000 Less: Closing Stock of Materials 900 2.00 1,800 Value of Material Consumed 4,100 102 41 10,200 Closing Stock is more than Opening Stock: In such a case, whatever stock remains at the end would contain the total of the opening stock as well as a part of the stock purchased during the current period. In such a case, closing stock should be valued by taking the total value of opening stock as well as the value of that part of the stock that relates to the current period purchases. Total Stock 5,000 2.40 12,000 Less: Closing Stock of Materials 2,000 2.25 4,500 Value of Material Consumed 3,000 2.50 7,500 Since Closing Stock (2,000 kgs) is more (by 1,000 kgs) than the Opening Stock (1,000 kgs), Value of closing stock = Value of Opening Stock   + Value of 1,000 units of stock purchased during the current period = (1,000 kgs × Rs. 2.00/kg) + (1,000 kgs × Rs. 2.50/kg) = (Rs. 2,000) + (Rs. 2,500) = Rs. 4,500 Average Method: Stock is valued at the average of the price of the total stock present in the current period (i.e. both the opening stock as well as stock purchased during the current period). This can be also understood as the "Weighted average of Prices taking Quantities as Weights" Total Stock 5,000 2.40 12,000 Less: Closing Stock of Materials 3,000 2.40 7,200 Value of Material Consumed 2,000 2.40 4,800 The rate applicable for valuing both the materials consumed as well as the closing stock would be the same under this method. What Method to Use? The decision to follow a particular method for valuing stocks is dependent on the outlook of the organisation. However, where standard costing systems are followed, it is a convention that the stocks are valued at standard prices. This would also ensure that the price variance relating to stocks purchased in a particular period would be absorbed within that period itself. Working Table: The given data arranged in the form of a working table Standard [Production: 1 unit] Actual [Production: 1,000 units] Quantity (kgs) Price Rs/kg Value/Cost (Rs) Quantity (kgs) Price Rs/kg Value/Cost (Rs) Material Used 2.5 2 5 3,000 8 3 8,000 Total 2.5   5 3,000   8,000 SP(SO) = SCMix SO ⇒ SP(SO) = Rs. 5 1 unit ⇒ SP(SO) = Rs. 5/unit Assumptions: None. Notice: The working table contains data relating to material consumed for the output achieved. But for the problem of deciding the value of closing stock, which would reveal the value of material consumed, there is no difference in approach for solving other problems and this problem. Price Variance related to purchases made during the current period Current Period purchases = 4,000 kgs Purchase price = Rs. 2.50/kg Standard price = Rs. 2/kg Price Variance relating to the purchases made during the current period     = Quantity Purchased (Standard Price − Actual Price)     = 4,000 kgs (Rs. 2/kg − Rs. 2.50/kg)     = 4,000 units (− Rs. 0.50/kg)     = − Rs. 2,000 [Adv] This will be the "Material Price Variance (MPV)" that you would find through your calculations. Though only the material consumed is considered for calculations, the MPV reveals the variance in relation to the purchases made during the current period. This happens if you value the Opening as well as Closing Stocks at Standard Prices. Approximate Decimal Values (Or) Exact Fractional Values :: What to use in Calculations? In calculations, where we come across fractions, we many a times use their approximate decimal equivalents (Say we use Rs. 2.67 in place of Rs. 8/3). Where you have used such approximate decimal equivalents, you need to understand that there would be slight variation in the answer arrived at. This would be crucial in this topic, where you are trying to verify the variances using the inter relationships among the variances. In such cases, slight adjustments would have to be made to arrive at the correct conclusion. To avoid such occurances, you can use the fractions themselves in calculations, instead of their approximate decimal equivalents. One another way the need for adjustment may be avoided is by using large number of digits after the decimal. Formulae Review and Complete Illustration

Solution » Calculations

• Material Cost Variance Study Notes ⇒ MCV = ({ AO SO × SQ } × SP ) − (AQ × AP) = ({ 1,000 units 1 unit × 2.5 kgs } × Rs. 2/kg ) − (3,000 kgs × Rs. 8 3 /kg) = ({1,000 × 2.5} × Rs. 2) − (1,000 × Rs. 8) = (Rs. 5,000) − (Rs. 8,000) = − Rs. 3,000 ⇒ MCV = − Rs. 3,000 [Adv] • Material Price Variance Study Notes ⇒ MPV = AQ (SP − AP) = 3,000 kgs (Rs. 2/kg − Rs. 8 3 /kg) = 3,000 kgs × ( Rs. 6/kg − Rs. 8/kg 3 ) = 1,000 kgs × (− Rs. 2/kg) = − Rs. 2,000 ⇒ MPV = − Rs. 2,000 [Adv] • Material Usage/Quantity Variance Study Notes MUV/MQV = ({ AO SO × SQ } − AQ ) × SP = ({ 1,000 units 1 unit × 2.5 kgs } − 3,000 kgs ) × Rs. 2/kg = ({1,000 × 2.5 kgs} − 3,000 kgs) × Rs. 2/kg = (2,500 kgs − 3,000 kgs) × Rs. 2/kg = (− 500 kgs) × Rs. 2/kg = − Rs. 1,000 ⇒ MUV/MQV = − Rs. 1,000 [Adv] • Material Mix Variance Study Notes Since there is only one type of material being used, there will be no Mix Variance i.e. MMV = 0 • Material Yield/Sub-Usage Variance Study Notes MYV = (AO − { AQMix SQMix × SO} ) × SP(SO) = (1,000 units − { 3,000 kgs 2.5 kgs × 1 unit} ) × Rs. 5/unit = (1,000 units − {1,200 × 1 unit} ) × Rs. 5/unit = (1,000 units − 1,200 units) × Rs. 5/unit = (− 200 units) × Rs. 5/unit = − Rs. 1,000 ⇒ MYV/MSUV = − Rs. 1,000 [Adv] Alternatively Since Material Mix Variance is zero all usage variance is yield variance i.e. MYV = MUV/MQV . MUV/MQV = MMV + MYV/MSUV = 0 + MYV/MSUV = MYV/MSUV Therefore, MYV/MSUV = − Rs. 1,000 [Adv]

Solution » Verification

MCV = MPV + MUV/MQV Using the above data we get, (− Rs. 3,000) = (− Rs. 2,000) + (− Rs. 1,000) ⇒ − Rs. 3,000 = − Rs. 3,000 → TRUE. MUV/MQV = MMV + MYV/MSUV Using the above data we get, Using the above data we get, (− Rs. 2,000) = (0) + (− Rs. 2,000) ⇒ − Rs. 2,000 = − Rs. 2,000 → TRUE. MCV = MPV + MMV + MYV/MSUV Using the above data we get, (− Rs. 3,000) = (− Rs. 2,000) + (0) + (− Rs. 1,000) ⇒ − Rs. 3,000 = − Rs. 3,000 → TRUE.

Credit : Sudheer Doppalapudi