Material Cost Variance

The Formulae » Material Cost Variance (MCV)

Material Cost Variance implies the variance in the total cost of materials i.e. the difference between the actual cost of materials and the standard cost of materials for actual output. ⇒ Material Cost Variance = Standard Cost of Materials for Actual Output − Actual Cost of Materials ⇒ MCV = SC for AO − AC = ( AO SO × SQ × SP) − (AQ × AP) Memorise this general formula for easier recollection (ignoring the specific formulae below) For each Material Separately ⇒ MCVMat = SCMat for AO − ACMat = ( AO SO × SQMat × SPMat) − (AQMat × APMat) For all Materials together [Total Material Cost Variance :: TMCV] When two or more types of materials are used for the manufacture of a product, the total Material Cost variance is the sum of the variances measured for each material separately. ⇒ TMCV = MCVA + MCVB + ... Direct Formula The Total Material Cost Variance is nothing but the MCV for the mix. ⇒ TMCV i.e. MCVMix = SCMix for AO − ACMix = ( AO SO × SQMix × SPMix) − (AQMix × APMix) This can be interpreted as Total Material Cost Variance = Standard Cost of Standard Mix for Actual Output − Actual Cost of Actual Mix

MCV Formula interpretation

The above formulae for Material Cost Variance, can be used in all cases i.e. both when AO = SO as well as when AO ≠ SO. When AO ≠ SO, the ratio AO/SO works as a correction factor to readjust the SQ to SQ for AO and thereby the SC to SC for AO. Where AO = SO When AO = SO, AO SO becomes 1 thus nullifying its effect, in which case the formula would read as: For each material separately MCV = (SQMat × SPMat) − (AQMat × APMat) For all the materials together TMCV = (SQMix × SPMix) − (AQMix × APMix) MCV = 0 Material cost variance for each material would be zero, when the actual quantity of material used and the standard quantity of material for actual output are the same as well as the actual price at which materials are purchased is equal to the standard price of materials. TMCV = 0 When more than one type of material is used, the Total MCV may become zero When the MCV on account of each material is zero, or when the unfavourable variance due to one or more materials is set off by the favourable variance due to one or more other materials. Therefore, it would not be appropriate to conclude that there is no variance on account of any material just because the total MCV is zero. Where the total MCV is zero, you have to verify individual variances before concluding that all the variances (MCV's) are zero.

Solution [Using the data as it is]

For working out problems with the data consider as it has been given without having to do any recalculations, use the above formulae (which are capable of being used in all cases) Consider the working table above: Standard [Production: 9500 units] Actual [Production: 22,800 units] Quantity (kgs) Price Rs/kg Value/Cost (Rs) Quantity (kgs) Price Rs/kg Value/Cost (Rs) Material A 900 15 13,500 2,250 16 36,000 Material B 800 45 36,000 1,950 42 81,900 Material C 200 85 17,000 550 90 49,500 Total 1,900 35 66,500 4,750 3,348 95 1,67,400 MCV = ({ AO SO × SQ } × SP ) − (AQ × AP) Using, MCVMat = ({ AO SO × SQMat } × SPMat ) − (AQMat × APMat) Material Cost Variance due to • Material A = ({ 22,800 units 9,500 units × 900 kgs } × Rs. 15/kg ) − (2,250 kgs × Rs. 16/kg) = (2.4 × 900 kgs × Rs. 15/kg) − (Rs. 36,000) = Rs. 32,400 − Rs. 36,000 = − Rs. 3,600 ⇒ MCVA = − Rs. 3,600 [Adv] • Material B = ({ 22,800 units 9,500 units × 800 kgs } × Rs. 45/kg ) − (1,950 kgs × Rs. 42/kg) = (2.4 × 800 kgs × Rs. 45/kg) − (Rs. 81,900) = Rs. 86,400 − Rs. 81,900 = + Rs. 4,500 ⇒ MCVB = + Rs. 4,500 [Fav] • Material C = ({ 22,800 units 9,500 units × 200 kgs } × Rs. 85/kg ) − (550 kgs × Rs. 90/kg) = (2.4 × 200 kgs × Rs. 85/kg) − (Rs. 49,500) = Rs. 40,800 − Rs. 49,500 = − Rs. 8,700 ⇒ MCVC = − Rs. 8,700 [Adv] Total Material Cost Variance (TMCV) = − Rs. 7,800 [Adv] Alternative for Total Variance The total material cost variance can be calculated wihthout calculating the variances for individual materials using the direct formula. Using TMCV i.e. MCVMix = ( AO SO × SQMix × SPMix) − (AQMix × APMix) = ( 22,800 units 9,500 units × 1,900 kgs × Rs. 35/kg) − (4,750 kgs × Rs. 3,348 95 /kg) = (2.4 × Rs. 66,500) − (50 × Rs. 3,348) = Rs. 1,59,600 − Rs. 1,67,400 = − Rs. 7,800 [Adv]

Solution [Using recalculated data]

Where you find that the SO ≠ AO, you may alternatively recalculate the standard to make the SO = AO and use the figures relating to the recalculated standard in the working table. In such a case, the formulae that you use would look simpler (without the adjustment factor AO/SO). From the data relating to the problem, it is evident that AO ≠ SO. Thus we recalculate the standard data for Actual Output [Refer to the calculations]. Consider the recalculated standard data and the actual data arranged in a working table. Standard [Production: 22,800 units] Actual [Production: 22,800 units] Quantity (kgs) Price Rs/kg Value/Cost (Rs) Quantity (kgs) Price Rs/kg Value/Cost (Rs) Material A 2,160 15 32,400 2,250 16 36,000 Material B 1,920 45 86,400 1,950 42 81,900 Material C 480 85 40,800 550 90 49,500 Total 4,560 35 1,59,600 4,750 3,348 95 1,67,400 MCV = (SQ × SP ) − (AQ × AP) Using, MCVMat = (SQMat × SPMat ) − (AQMat × APMat) Material Cost Variance due to • Material A = (2,160 kgs × Rs. 15/kg) − (2,250 kgs × Rs. 16/kg) = Rs. 32,400 − Rs. 36,000 = − Rs. 3,600 ⇒ MCVA = − Rs. 3,600 [Adv] • Material B = (1,920 kgs × Rs. 45/kg) − (1,950 kgs × Rs. 42/kg) = Rs. 86,400 − Rs. 81,900 = + Rs. 4,500 ⇒ MCVB = + Rs. 4,500 [Pos] • Material C = (480 kgs × Rs. 85/kg) − (550 kgs × Rs. 90/kg) = Rs. 40,800 − Rs. 49,500 = − Rs.8,700 ⇒ MCVC = − Rs. 8,700 [Adv] Total Material Cost Variance (TMCV) = − Rs. 7,800 [Adv] Note: The above formula can be used only when the standard output and the actual output are the same. Alternative for Total Variance The total material cost variance can be calculated wihthout calculating the variances for individual materials using the direct formula. Using TMCV i.e. MCVMix = (SQMix × SPMix) − (AQMix × APMix) ⇒ TMCV i.e. MCVMix = (4,560 kgs × Rs. 35/kg) − (4,750 kgs × Rs. 3,348 95 /kg) = Rs. 1,59,600 − Rs. 1,67,400 = − Rs. 7,800 [Adv] You dont need to recalculate the standard The formula with the adjustment factor AO/SO can be used in all cases i.e. both when AO = SO and AO ≠ SO. Therefore, you don't need to rebuild the working table by recalculating the standards for the purpose of finding the variances. Check: The same problem was solved in both the cases above. The only difference being that in the second case, the data was considered by recalculating the Standard for Actual Output to make AO = SO.

Who is held responsible for the Variance?

Since Material Cost Variance represents the total difference on account of a number of factors it would not be possible to directly fix the responsibility for the variance. This explains the reason for analysing the variance and segregating it into its constituent parts.

Constituents of Material Cost Variance

In the overview of material variances we have seen that the material cost variance is actually a synthesis of two variances, "Material Price Variance" and "Material Usage/Quantity Variance". We know, MCV = ({ AO SO × SQ } × SP ) − (AQ × AP) = ({ AO SO × SQ } × SP ) + [− (AQ × AP)] [Adding and deducting (AQ × SP)] = ({ AO SO × SQ } × SP ) + [− (AQ × SP) + (AQ × SP)] − (AQ × AP)] [Adding and deducting the same quantity does not alter The value of the expression] = [({ AO SO × SQ } × SP ) − (AQ × SP)] + [(AQ × SP) − (AQ × AP)] = [Material Usage Variance] + [Material Price Variance] MCV = MUV + MPV

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