Materials :: Recalculating Standard Quantity/Cost for/of actual Output

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Standards for Actual Output  
 
Standards for actual output can be seggregated as
  • Standard Quantity for Actual Output [SQ for AO]

    The quantity of material that should have been used for the actual output, had the usage of materials been as per the standard.
  • Standard Cost for Actual Output [SC for AO]

    The material cost that would have been incurred for the actual output, had the materials been used (quantity) and purchased (price) at the rates as per the standard.
Budgeted/Standard
[Output : 150 units]
Actual
[Output : 150 units]
Quantity
(kgs)
Price
(Rs/kg)
Cost
(Rs)
Quantity
(kgs)
Price
(Rs/kg)
Cost
(Rs)
Material Used 450 4 1,800 440 5 2,200

Where the Standard output and Actual Output are the same i.e. SO = AO, these figures can be obtained straightaway from the available data by building up the working table.

The standard is given for 150 units of output and the actual output achieved is also 150 units.

Where are these figures used?

The standard quantity and cost for actual output are useful in identifying
  • The variance in quantity of material used by comparing the actual quantity of materials used (440 kgs) and the standard quantity of materials (450 kgs). This variance valued at the standard rates/prices gives what is called the "Material Usage/Quantity Variance".

  • The variance in cost can be identified by comparing the actual cost (Rs. 2,200) and the standard cost (Rs. 1,800). This variance is what is called "Material Cost Variance".

Why Recalculate Standards

Standards may be expressed for any level of activity. We may be required to recalculate the standards for a level of activity other than the one given. This recalculation may be based on (a) the actual output where we obtain the Standard Quantity for Actual Output and Standard Cost for Actual Output or (b) the actual input where we obtain the Standard Quantity for Actual Input and Standard Output for Actual Input.

Where Standard Output (SO) and Actual Output (AO) are not equal i.e. SO ≠ AO, we cannot obtain the variances by comparing the given data. In such a case we will have to recalculate the standards such that the AO and SO would be the same to enable us to derive variances by comparison.

Budgeted/Standard
[Output : 1,000 units]
Actual
[Output : 210 units]
Quantity
(kgs)
Price
(Rs/kg)
Cost
(Rs)
Quantity
(kgs)
Price
(Rs/kg)
Cost
(Rs)
Material Used 2,250 2 4,500 480 2 960

From this data, is it appropriate to say that the production was achieved at a lesser cost? or that the materials had been used efficiently? Surely not. Why?

Because the materials actually consumed and the cost incurred is for manufacturing 210 units whereas the budget/standard is for manufacturing 1,000 units.

  • Comparing the actual material consumed for 210 units of output (480 kgs) with the standard quantity of materials for 1,000 units of output (2,250 kgs) and concluding that the material consumed is very low is inappropriate.
  • At the same time, comparing the actual material cost incurred for 210 units of output (Rs. 960) with the standard material cost of 1,000 units of output (Rs. 2,250) and concluding that the cost incurred is very low is also erroneous.

The comparison would be appropriate and meaningful if we compare

  • The standard quantity of materials of 210 units which works out to 472.5 kgs {(2,250 ÷ 1,000) × 210} and the actual quantity of materials used.
  • The standard material cost of 210 units which works out to Rs. 945 {(4,500 ÷ 1,000) × 210} and the actual cost of 210 units.

Therefore to find

  • The variance in the quantity of material used we need the standard quantity for actual output.
  • The variance in the cost of materials we need the standard cost for actual output.

Recollect that standards can be built for any production level. Standards may be expressed for either 1 unit of output, 2 units of output, ... to any production level. Recalculating standards implies drawing up the standards for a particular production level based on our calculation needs.

Formula » Standard Quantity for Actual Output  
 
Consider the following 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

The standard output and the actual output are not the same.

Standard Quantity for Actual Output

The logic behind the calculation and the formula for deriving the required quantity
  • For Each Material Separately

    Logic
    If the standard production of 9,500 units, the standard quantity of materials (A) is 900 kgs
    If the standard production is 22,800 units, the quantity of materials (A) would be ??

    Standard Quantity (A) for an Output of 22,800 units
    =
    22,800 units {Actual Output}
    9,500 units {Standard Output}
    × 900 kgs {Standard Quantity of Material A}

      ⇒ SQMat for AO =
    AO
    SO
    × SQMat

    Using the data given above,

    Standard Quantity for Actual Output [SQ for AO] for
    Material A =
    22,800 units
    9,500 units
    × 900 kgs
    ⇒ SQA for AO = 2.4 × 900 kgs = 2,160 kgs
    Material B =
    22,800 units
    9,500 units
    × 800 kgs
    ⇒ SQB for AO = 2.4 × 800 kgs = 1,920 kgs
    Material C =
    22,800 units
    9,500 units
    × 200 kgs
    ⇒ SQC for AO = 2.4 × 200 kgs = 480 kgs
    Total 4,560 kgs

  • For All Materials Together

    Logic
    If the standard production of 9,500 units, the standard quantity of materials is 1,900 kgs
    If the standard production is 22,800 units, the quantity of materials would be ??

    Standard Quantity for an Output of 22,800 units
    =
    22,800 units {Actual Output}
    9,500 units {Standard Output}
    × 1,900 kgs {Standard Quantity (Standard Mix)}
      ⇒ SQMix for AO =
    AO
    SO
    × SQMix

    Using the data given above,

    Standard Quantity for Actual Output [SQ for AO] for
    Total/All Materials =
    22,800 units
    9,500 units
    × 1,900 kgs
    ⇒ SQMix for AO = 2.4 × 1,900 kgs = 4,560 kgs

Formula » Standard Cost for Actual Output  
 
Consider the following 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

Standard Cost for Actual Output

The logic behind the calculation and the formula for deriving the required cost
  • For each Material Separately

    Standard Cost for Actual Output = Standard Quantity for Actual Output × Standard Price.

    ⇒ SCMat for AO = SQMat for AO × SP
    (Or) =
    AO
    SO
    × SQMat × SPMat
    (Or) =
    AO
    SO
    × SCMat
    [Useful where SQMat for AO is already calculated]
    [Useful where SQMat, SPMat, SO, AO data is available]
    [Useful where only SCMat, AO, SO data is available]

    Using the data in the above example,

    Standard Cost for Actual Output [SC for AO] for
    Material A =
    22,800 units
    9,500 units
    × 900 kgs × Rs. 15/kg
      ⇒ SCA for AO = 2.4 × Rs. 13,500 = Rs. 32,400
    Material B =
    22,800 units
    9,500 units
    × 800 kgs × Rs. 45/kg
      ⇒ SCB for AO = 2.4 × Rs. 36,000 = Rs. 86,400
    Material C =
    22,800 units
    9,500 units
    × 200 kgs × Rs. 85/kg
      ⇒ SCC for AO = 2.4 × Rs. 17,000 = Rs. 40,800
    Total Rs. 1,59,600

  • For all Materials together

    Standard Cost of Standard Mix for Actual Output
        = Standard Quantity of Standard Mix for Actual Output × Standard Price of Standard Mix.

    ⇒ SCMix for AO = SQMix for AO × SPMix
    (Or) =
    AO
    SO
    × SQMix × SPMix
    (Or) =
    AO
    SO
    × SCMix
    [Useful where SQMix for AO is already calculated]
    [Useful where SQMix, SPMix, SO, AO data is available]
    [Useful where only SCMix, AO, SO data is available]

    Using the data in the above example,

    Standard Cost for Actual Output [SC for AO] for
    All Materials =
    22,800 units
    9,500 units
    × 1,900 kgs × Rs. 35/kg
      ⇒ SCMix for AO = 2.4 × Rs. 66,500 = Rs. 1,59,600

    Standard Price of Mix =
    Standard Cost of Mix
    Standard Quantity of Mix
    SPMix =
    SCMix
    SQMix

    Using the data in the above example,

    Standard Price of Mix
    ⇒ SPMix =
    Rs. 66,500
    1,900 kgs
    = Rs. 35/kg

The above data (in the working table) with the recalculated standard would be.

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

By recalculating the standard for the actual output we would make the standard output and actual output in the recalculated data to be the same.

Author Credit : The Edifier ... Continued Page M:3

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