Standards set for material consumption in the manufacture of a product was 600 kgs @ 4.50 per kg.

In a cost period:

Opening stock was 500 kg @ 4.40 per kg.

Purchases made 2,500 kg @ 5 per kg.

Consumption 750 kg.

Calculate

1. Cost Variance
2. Usage Variance

3. Price Variance, when it is calculated

   1. during the period of purchase
   2. during the period of issue on FIFO basis
   3. during the period of issue on LIFO basis.
4. Mix Variance
5. Yield Variance

What would be the effect of such valuations on closing stock valuation?.

The following data could be picked up from the problem

units : _Q in kgs, _P in value/kg and _O in units

The price attributable to consumption (?) is dependent on the method adopted for valuing closing stock.

Interpretation

Material price variance is required to be calculated under three different conditions, each of which results in a distinct method of valuation being applied for valuing closing stock.

• Price Variance calculated during the period of purchase

  This implies that all the price variance is being taken into account during the period of purchase itself. This will happen if the stocks are valued at standard prices.

• Price Variance calculated during the period of issue under FIFO method

  This implies that the price variance is being taken into account during the period of issue or consumption and the method of valuation of closing stock to be followed is FIFO method.

• Price Variance calculated during the period of issue under LIFO method

  This implies that the price variance is being taken into account during the period of issue or consumption and the method of valuation of closing stock to be followed is LIFO method.

Calculations

• Quantity of Closing Stock

  = Opening Stock + Current period purchases − Consumption

  = 500 kgs + 2,500 kgs − 750 kgs

  = 2,250 kgs

• Value and price of material consumed

  Value of material consumed is dependent on the value of closing stock.

  Since three possible methods for valuation of closing stock are to be considered, there would be possible values and as such three possible prices for material consumed.

  • Standard Price

    Closing stock is valued at standard price.

    If standard pricing is being adapted, all stocks would appear valued at the standard prices. Thus the opening stock is also valued at 4.5 per kg instead of its original value 4.4 per kg.

    	Quantity (lbs)	Price /lb	Value
    Opening Stock (+) Current Period Purchases	500 2,500	4.5 5	2,250 12,500
    Total Stock (−) Closing Stock	3,000 2,250	4.92 4.5	14,750 10,125
    Value of Material Consumed	750	6.17	4,625

    The price of total stock and material consumed are approximate values rounded off to the nearest two digits after decimal.

  • FIFO Method

    Closing stock is valued at the current period purchase price under this method.

    	Quantity (lbs)	Price /lb	Value
    Opening Stock (+) Current Period Purchases	500 2,500	4.4 5	2,200 12,500
    Total Stock (−) Closing Stock	3,000 2,250	4.9 5	14,700 11,250
    Value of Material Consumed	750	4.6	3,450

  • LIFO Method

    Closing stock is valued at the price at which opening stocks are valued.

    	Quantity (lbs)	Price /lb	Value
    Opening Stock (+) Current Period Purchases	500 2,500	4.4 5	2,200 12,500
    Total Stock (−) Closing Stock	3,000 2,250	4.9 4.4	14,700 9,900
    Value of Material Consumed	750	6.4	4,800

  Note

  • Values of opening stock, purchases and closing stocks are obtained as quantity × price
  • Value of material consumed is the balancing figure obtained as opening stock + purchases − closing stock.

  • Price of material consumed

    =	Value of Material Consumed Quantity of Material Consumed

Output (_O) is in units, Quantities (_Q) and Losses (_L) are in lbs, Prices (_P) are in monetary value per lb and Costs (_C) are in monetary values.

Variations under the three methods

Under the three methods only the value of Actual Price (AP) and the Actual Cost (AC) which is based on it vary. Everything else would be the same.

All variances are worked out using the price under the standard method. Calculations for Material Price Variance and Material Cost Variance which are the only two variances which vary are shown for the two other variations.

Standard Output

Actual Output

2. SC(AO) = SQ(AO) × SP

3. SO(AO) = AO

5. SC(AI) = SQ(AI) × SP

7. SC(AQ) = AQ × SP

Material Cost Variance

MCV = SC(AO) − AC

Material Price Variance

MPV = SC(AQ) − AC

Material Quantity/Usage Variance

MQV/MUV = SC(AO) − SC(AQ)

Material Mix Variance

MMV = SC(AI) − SC(AQ)

Material Yield/Sub-Usage Variance

MYV/MSUV = SC(AO) − SC(AI)

Variances based on alternative values for actual price of material consumed.

• FIFO

  Material Cost Variance

  MCV = SC(AO) − AC

  =

  2,700 − 3,450

  =

  − 750 [Adv]

  Material Price Variance

  MPV = SC(AQ) − AC

  =

  3,375 − 3,450

  =

  − 75 [Adv]

• LIFO

  Material Cost Variance

  MCV = SC(AO) − AC

  =

  2,700 − 4,800

  =

  − 2,100 [Adv]

  Material Price Variance

  MPV = SC(AQ) − AC

  =

  3,375 − 4,800

  =

  − 1,425 [Adv]

Verification

Simplest

If it is for verification purposes, we may avoid the formula column.

Please adopt a presentation based on the examination you are attending, the proportion of marks allotted and time available to/for the problem.