Material Price Variance

... From Page M:6
A Problem  
 
900 kgs of Material A @ Rs. 15 per kg, 800 kgs of Material B @ Rs. 45/kg and 200 kgs of Material C @ Rs. 85 per kg were planned to be purchased/used for manufacturing 9,500 units. 2,250 kgs of Material A @ Rs. 16 per kg, 1,950 kgs of Material B @ Rs. 42/kg and 550 kgs of Material C @ Rs. 90 per kg were purchased/used actually for manufacturing 22,800 units.

What is the variation in total cost on account of variation in purchase price?
This information is provided by the material price variance.

The problem data arranged in a working table:

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

You need not calculate the data for SPMix and APMix for the purpose of calculating Material Price Variances.

The Formulae » Material Price Variance (MPV)  
 
The variance in the total cost of materials on account of a variation between the standard price (price at which the materials should have been purchased) and the actual price (price at which they have been purchased).

It is calculated as the difference between the standard cost of actual materials and the actual cost of materials.
⇒ Material Price Variance = Standard Cost of Actual Quantity of Materials − Actual Cost of Materials
= (Actual Quantity × Standard Price) − (Actual Quantity × Actual Price)

MPV = (AQ × SP) − (AQ × AP)
= AQ × (SP − AP)

Memorise this general formula for easier recollection (ignoring the specific formulae below)

  • For each Material Separately

    MPVMat = (AQMat × SPMat) − (AQMat × APMat)
    = AQMat × (SPMat − APMat)
  • For all Materials together [Total Material Price Variance :: TMPV]

    When two or more types of materials are used for the manufacture of a product, the total Material Price variance is the sum of the variances measured for each material separately.
    TMPV = MPVA + MPVB + .....

    No Direct Formula

    There is no direct formula for calculating the total material price variance.
    TMPV ≠ AQMix (SPMix − APMix)

MPV Formula interpretation  
 
The above formulae for Material Price Variance can be used in all cases i.e. when AO = SO, AO ≠ SO, SQMix = AQMix and SQMix ≠ AQMix. Standard Price present in the formula is unaffected by standard recalculation. Standard Quantity which changes on recalculating standards is not found in the formula.
  • MPV = 0

    Material Price Variance for each material would be zero if the price at which a material is purchased (AP) is the same as its standard price (SP).
  • TMPV = 0

    When more than one type of material is used, the Total Material Price Variance may become zero
    1. When the MPV on account of each material is zero, or
    2. 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 all the materials are bought at the standard rates just because the total MPV is zero.

    Where the total MPV is zero, you have to verify individual variances before concluding that all the individual variances (MPV's) are zero.

Recalculating Standards does not effect MPV Calculations  
 
Recalculating Standards does not affect the data used for calculating Material Price Variance. The formula for calculating Material Price Variance involves AQ, SP and AP. It does not involve and thus is not influenced by SQ. These data would not change on standards being recalculated either based on the output or input.

SO ≠ AO and SQMix ≠ AQMix

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   66,500 4,750   1,67,400

Standards Recalculated for the Actual Output

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   1,59,600 4,750   1,67,400

Standards Recalculated for Actual Input

Standard
[Production: 23,750 units]
Actual
[Production: 22,800 units]
Quantity
(kgs)
Price
Rs/kg
Value/Cost
(Rs)
Quantity
(kgs)
Price
Rs/kg
Value/Cost
(Rs)
Material A 2,250 15 33,750 2,250 16 36,000
Material B 2,000 45 90,000 1,950 42 81,900
Material C 500 85 42,500 550 90 49,500
Total 4,750   1,66,250 4,750   1,67,400

Solution [in all cases]  
 
The data that is used for calculating Material Price Variances can be picked up from the working table built with the data given (as it is) or with the data involving recalculated standards based on either the Actual Output or the Actual Input.

MPV = (AQ × SP) − (AQ × AP) ⇒ MPV = AQ (SP − AP)

Using MPVMat = AQMat (SPMat − APMat)

Material Price Variance due to
• Material A = 2,250 kgs (Rs. 15/kg − Rs. 16/kg)
= 2,250 kgs (− Rs. 1/kg)
= − Rs. 2,250 ⇒ MPVA = − Rs. 2,250 [Adv]
• Material B = 1,950 kgs (Rs. 45/kg − Rs. 42/kg)
= 1,950 kgs (Rs. 3/kg)
= + Rs. 5,850 ⇒ MPVB = + Rs. 5,850 [Fav]
• Material C = 550 kgs (Rs. 85/kg − Rs. 90/kg)
= 550 kgs (− Rs. 5/kg)
= − Rs. 2,750 ⇒ MPVC = − Rs. 2,750 [Adv]
Total Material Price Variance = + Rs. 850 [Pos or Fav]

Formulae using Inter-relationships among Variances  
 
MCV = MPV + MUV/MQV   → (1)
⇒ MPV = MCV − MUV/MQV

  • For each Material Separately

    MPVMat = MCVMat − MUV/MQVMat
  • For All Materials Together

    MPVMix = MCVMix − MUV/MQVMix
MUV/MQV = MMV + MYV   → (2)

MCV = MPV + MMV + MYV   → (3)   [From (1) and (2)]
⇒ MPV = MCV − MMV − MYV

  • For each Material Separately

    MPVMat = MCVMat − MMVMat − MYVMat
  • For All Materials Together

    MPVMix = MCVMix − MMVMix − MYVMix

Who is held responsible for the Variance?  
 
Since this variance is on account of the price being more or less than the standard, the people or department responsible for purchasing materials can be held responsible for this variance.
Author Credit : The Edifier ... Continued Page M:8

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