Materials :: Standard/Actual/Budgeted Input/Output/Quantity/Rate/Cost

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Material Cost & Variance  
 

Material Variance

Material Variance implies the variances in the cost incurred on materials used for obtaining the output.

Material Cost

It is the cost of materials used in the manufacture of a product. Since Value = Quantity × Price (≡ Cost of Materials = Quantity of Materials × Price of Materials), we can say that the material cost is influenced by two factors, (1) The quantity of material used; and (2) The price at which the materials are acquired.

The following data is referred to in all the explanations hereafter

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

Standards  
 
The term standard implies "A basis for comparison i.e. a reference in comparison to which other things can be evaluated". The following terms involving standards are relevant to this topic.
  • Standard Quantity (of Materials Input) [SQMat]

    The quantity of a particular type of material required for manufacturing the product. It may be expressed in terms of (for) one or more units output.

    1. Standard Material required for producing 1 unit is 10 kg.
    2. Standard output is 120 units and the material required for the same is 1,200 kg.

    Where more than one material is used for producing the output, we recognise or identify

    • The quantity of each material separately as "Standard Quantity of Material" [SQMat]

      From the above data
      SQA = 900 kgs; SQB = 800 kgs; SQC = 200 kgs;

    • The quantity of all the materials together as "Standard Quantity of Mix" [SQMix].
      Standard Quantity of Mix = Sum of the Standard Quantities of Individual Materials
        ⇒ SQMix = SQA + SQB + .......

      From the above data
      SQMix = SQA + SQB + SQC
      = 900kgs + 800 kgs + 200 kgs
      = 1,900 kgs

      Where there is only one material SQMix and SQMat would be the same i.e. SQMix = SQMat.

  • Standard Mix Ratio

    Where there are two or more materials involved in the production process, this indicates the ratio in which the component materials are to be mixed, if the production process is carried on according to plans. It is the ratio of the standard quantities of materials.

    From the above data,
    Standard Mix Ratio = SQA : SQB : SQC
    = 900 kgs : 800 kgs : 200 kgs
    = 9 : 8 : 2

  • Standard Price (of Materials Input) [SPMat]

    The price at which the materials used in the production process are planned to be purchased.

    Where more than one material is used for producing the output, we recognise or identify

    • The price of each material separately as "Standard Price of Material" [SPMat]

      From the above data,
      SPA = Rs. 15/kg; SPB = Rs. 45/kg; SPC = Rs. 85/kg;

    • The price of all the materials together as "Standard Price of Mix" [SPMix].
      It is the weighted average of the prices of component materials taking standard quantities as weights.
      Standard Price of Mix =
      Standard Cost of Mix
      Standard Quantity of Mix
      ⇒ SPMix =
      SCMix
      SQMix

      From the above data,
      SPMix =
      Rs. 66,500
      1,900 kg
      = Rs. 35/kg

    Note:

    Where there is only one material SPMix and SPMat would be the same i.e. SPMix = SPMat.
  • Standard Cost (of Materials Input) [SCMat]

    The cost of materials for manufacturing one or more units of the product had all the actions been according to plans.

    It is the value of standard quantity of materials taken at the standard price.
      Standard Cost = Standard Quantity × Standard Price
      ⇒ SCMat = SQMat × SPMat

    Where more than one material is used for producing the output, we recognise or identify

    • The cost of each material separately as "Standard Cost of Material" [SCMat]

      From the above data,
      SCA = SQA × SPA SCB = SQB × SPB SCC = SQC × SPC
      = 900 kgs × Rs. 15/kg = 800 kgs × Rs. 45/kg = 200 kgs × Rs. 85/kg
      = Rs. 13,500 = Rs. 36,000 = Rs. 17,000

    • The cost of all the materials together as "Standard Cost of Mix" [SCMix].

      Standard Cost of Mix = Sum of the Standard Costs of Individual Materials
      SC(SM) = SCA + SCB + .......

      From the above data,
      SCMix = SCA + SCB + SCC
      = Rs. 13,500 + Rs. 36,000 + Rs. 17,000
      = Rs. 66,500

      Alternatively, SCMix = SQMix × SPMix

      From the above data,
      SCMix = SQMix × SPMix
      = 1,900 kgs × Rs. 35/kg
      = Rs. 66,500

    • Where there is only one material SCMix and SCMat would be the same i.e. SCMix = SCMat.

  • Standard Output/Production [SO]

    It is the output achieved using the standard quantity of materials.

    From the above data
    SO = 9,500 units

  • Standard Loss [SL]

    It indicates the normal loss of materials. This is generally expressed over the total quantity of materials i.e. the mix and not for individual materials. The loss is expressed in the same units in which the input materials are expressed.

    From the above data
    SL =

  • Standard Price of Output/Yield [SP(SO/SY)]

    The standard cost incurred per unit output. This can be calculated for each material separately or for all the materials together.
    Standard Price of Standard Output (All Materials) =
    Standard cost of Mix
    Standard Output
    ⇒ SP(SO)Mix =
    SCMix
    SO

    From the above data,
    SP(SO)Mix =
    SCMix
    SO
    =
    Rs. 66,500
    9,500 units
    = Rs. 7/unit

    Standard Price of Standard Output (Each Material) =
    Standard Cost of the Material
    Standard Output
    ⇒ SP(SO)Mat =
    SCMat
    SO

    From the above data,
    SP(SO)A =
    SCA
    SO
    SP(SO)B =
    SCB
    SO
    SP(SO)C =
    SCC
    SO
    =
    Rs. 13,500
    9,500 units
    =
    Rs. 36,000
    9,500 units
    =
    Rs. 17,000
    9,500 units
    =
    Rs.
    27
    19
    /unit
    =
    Rs.
    72
    19
    /unit
    =
    Rs.
    34
    19
    /unit

Actuals  
 
The term actual relates to the data pertaining to the actual activity. The following terms involving actuals are relevant to this topic.
  • Actual Quantity (of Materals Input)

    The quantity of material(s) actually used for manufacturing the product. It may be expressed in terms of (for) one or more units output.
    1. The Material used for producing 1 kg of the product is 18 units.
    2. 2,450 tons of the material have been used in producing an output of 8 million units.

    Where more than one material is used for producing the output, we recognise or identify

    • The quantity of each material used separately using the phrase "Actual Quantity of Material" [AQMat]

      From the above data,
      AQA = 2,250 kgs; AQB = 1,950 kgs; AQC = 550 kgs;

    • All the materials together as "Actual Quantity of Mix" [AQMix].
      Actual Quantity of Mix = Sum of the Actual Quantities of Individual Materials
        ⇒ AQMix = AQA + AQB + .......

      From the above data,
      AQMix = AQA + AQB + AQC
      = 2,250kgs + 1,950 kgs + 550 kgs
      = 4,750 kgs
      Where there is only one material AQMix and AQMat would be the same i.e. AQMix = AQMat.

  • Actual Mix Ratio

    Where there are two or more materials involved in the production process, this indicates the actual ratio in which the component materials are mixed. It is the ratio of the actual quantities of materials.

    From the above data,
    Actual Mix (Ratio) = AQA : AQB : AQC
    = 2,250 kgs : 1,950 kgs : 550 kgs
    = 45 : 39 : 11

  • Actual Output [AO]

    It is the output that is actually achieved using the actual quantity of materials.

    From the above data,
    AO = 22,800 units

  • Actual Price (of Materials )

    The price at which the materials used in the production process are to be valued. (Normally the purchase price)

    Where more than one material is used for producing the output, we recognise or identify the price of

    • Each material separately as "Actual Price of Material" [APMat]

      From the above data,
      APA = Rs. 16/kg; APB = Rs. 42/kg; APC = Rs. 90/kg;

    • All the materials together as "Actual Price of Mix" [APMix].
      It is the weighted average of the actual prices of component materials taking actual quantities as weights.
      Actual Price of Mix =
      Actual Cost of Mix
      Actual Quantity of Mix
      ⇒ APMix =
      ACMix
      AQMix

      From the above data,
      APMix =
      Rs. 1,67,400
      4,750 kg
      =
      Rs.
      3,348
      95
      /kg

    Note:

    Where there is only one material APMix and APMat would be the same i.e. APMix = APMat.

  • Actual Cost

    The actual cost of materials incurred for manufacturing the actual output.

    It is the value of actual quantity of materials taken at the actual price.
      ⇒ Actual Cost = Actual Quantity × Actual Price
      ⇒ ACMat = AQMat × APMat

    Where more than one material is used for producing the output, we recognise or identify the cost of

    • Each material separately as "Actual Cost of Material" [ACMat]

      From the above data,
      ACA = AQA × APA ACB = AQB × APB ACC = AQC × APC
      = 2,250 kgs × Rs. 16/kg = 1,950 kgs × Rs. 42/kg = 550 kgs × Rs. 90/kg
      = Rs. 36,000 = Rs. 81,900 = Rs. 49,500

    • All the materials together as "Actual Cost of Mix" [ACMix].

      Actual Cost of Mix = Sum of the Actual Costs of Individual Materials
        ⇒ ACMix = ACA + ACB + .......

      From the above data,
      ACMix = ACA + ACB + ACC
      = Rs. 36,000 + Rs. 81,900 + Rs. 49,500
      = Rs. 1,67,400

      Alternatively, ACMix = AQMix × APMix

      From the above data,
      ACMix =
      4,750 kgs × Rs.
      3,348
      95
      /kg
      = Rs. 1,67,400

    • Where there is only one material SCMix and SCMat would be the same i.e. SCMix = SCMat.

  • Actual Loss [AL]

    It indicates the actual loss of materials. This is expressed over the total quantity of materials i.e. the mix and not for individual materials. The loss is expressed in the same units in which the input materials are expressed. This data is used to assess the actual output only.

    From the above data,
    AL =

  • Standard Cost (of Actual Quantity of Materials )

    The cost of materials arrived at by considering the actual quantity of materials used and valuing them at standard price.

    Standard Cost of Actual Quantity = Actual Quantity × Standard Price
      ⇒ SC of AQ = AQ × SP

    Where more than one material is used for producing the output, we recognise or identify the cost of

    • Each material separately as "Standard Cost of Actual Quantity" [SC of AQMat]

      From the above data,
      SC of AQA = AQA × SPA SC of AQB = AQB × SPB SC of AQC = AQC × SPC
      = 2,250 kgs × Rs. 15/kg = 1,950 kgs × Rs. 45/kg = 550 kgs × Rs. 85/kg
      = Rs. 33,750 = Rs. 87,750 = Rs. 46,750

    • All the materials together as "Standard Cost of Actual Mix" [SC of AQ Mix].
      Standard Cost of Actual Mix = Sum of the Standard Cost of Actual Quantities of Individual Materials
        ⇒ SC of AQMix = SC of AQA + SC of AQB + .......

      From the above example
      SC of AQMix = SC of AQA + SC of AQB + SC of AQC
      = Rs. 33,750 + Rs. 87,750 + Rs. 46,750
      = Rs. 1,68,250

      Note that SC of AQMix ≠ AQMix × SPMix

      The formula cannot be applied for the actual quantity of mix. This is for the reason that SPMix is the weighted average of Standard Prices taking standard quantities as weights and the present calculation considers the actual quantities.

Working Table (for Problem Solving)  
 
Preparing a working table as given below would give you all the information that you need. You can construct this table very easily. All the data mentioned above can be straight away obtained from this table except the SC for AQ, SCMix for AO and SP(SO)
Standard
[Production: SO]
Actual
[Production: AO]
Quantity
(kgs)
Price
Rs/kg
Value/Cost
(Rs)
Quantity
(kgs)
Price
Rs/kg
Value/Cost
(Rs)
Material A SQA SPA SCA AQA APA ACA
Material B SQB SPB SCB AQB APB ACB
Material C ... ... ... ... ... ...
Total SQMix SPMix SCMix AQMix APMix ACMix
Less: Loss @x% SL     AL    

Input and Output need not be in the same terms

The input and output may or may not be in the same unit terms.
  • Standard Quantity of Materials required for producing 1 unit of DEXAR are 20 tons of AMY and 15 tons of TRE. Here the input (in tons) and output (in units) are in different terms.

  • The Actual Quantity of Materials [AQMix] used for producing 9 tons of SUFTRA is 12 tons comprising of 5 tons of Chemical A, 4 tons of Chemical B and 3 tons of Material Z. Here the input (in tons) and the output (in tons) are in the same terms.

Budget/Budgeted  
 
A Budget is a depiction of the future in quantitative terms.
  1. A Production Budget indicates the production that is planned to be achieved over a future period or production process.
  2. A cash budget indicates the inflow and outflow of cash over a certain future period.
  3. An expenditure budget indicates the expenditure that is to be incurred over the budget period.

Budgeted

The term budgeted relates to the data pertaining to a specified level of activity that has been planned to be achieved. The following terms involving budgets are relevant to this topic.
  • Budgeted Quantity/Input (of Materials)

    It is the standard quantity of materials input into the production process for achieving the budgeted output.
    Budgeted Quantity of Materials = Standard Quantity of Materials × Budgeted Output
      ⇒ BQ = SQ × BO

  • Budgeted Output/Production

    It is the output that is planned to be achieved during a period or production process.

  • Budgeted Price/Rate (of Materials )

    It is nothing but the standard price.
      ⇒ BP = SP
  • Budgeted Cost

    The cost of materials incurred for manufacturing the budgeted output .
    It is the value of budgeted quantity of materials taken at the standard price.

    Budgeted Cost of Materials = Budgeted Quantity of Materials × Standard Price
      ⇒ BC = BQ × SP

Budgeted vs Standard

Budgeted indicates a specific level of activity and Standard may indicate any level of activity.

For example,

  1. "Budgeted Output" is the output that is planned to be achieved by the organisation in a given period/process and "Standard Output" is "that output for which the standards are expressed".
  2. "Standard Cost" gives an idea of how much each unit of the product should cost under normal circumstances. "Budget Cost" gives an idea of the cost that should be incurred for bringing out the budget quantity of output (over a certain period or in a certain process) under normal circumstances.

Sometimes, we use the terms Budgeted and Standard synonymously, but they need not be the same.

For analysing variances, we need the standards

In analysing variances we need the data relating to the standards, i.e. data relating to the standard quantity (SQ), price (SP) and output (SO).

Budgets are always as per the standard

It should be noted that the budgeted data is always based on standards. Standards are fixed for each unit of production and budgeted data is relevant to a particular production level. Standards may be expressed for any level (1 unit, 2 units, 10 units,... or for any production level) and the budgets are based on the standards.

Since budgeted data is standard data for a particular production level we do not need separate data for the standard when the budgeted data is given.

  • SO = BO

    The standard output and the budgeted output are the same.

    Standard
    [Production: 1 unit]
    Budgeted
    [Production: 1 unit]
    Actual
    [Production: 1 unit]
    Quantity
    (kgs)
    Price
    (Rs/kg)
    Cost
    (Rs)
    Quantity
    (kgs)
    Price
    (Rs/kg)
    Cost
    (Rs)
    Quantity
    (kgs)
    Price
    (Rs/kg)
    Cost
    (Rs)
    Material Used 20 10 200 20 10 200 21 11 231

    The actual output, the standard output and the budgeted output are the same i.e. 1 unit.
  • SO ≠ BO

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

    Standard
    [Production: 10 units]
    Budgeted
    [Production: 25 units]
    Actual
    [Production: 24 units]
    Quantity
    (kgs)
    Price
    (Rs/kg)
    Cost
    (Rs)
    Quantity
    (kgs)
    Price
    (Rs/kg)
    Cost
    (Rs)
    Quantity
    (kgs)
    Price
    (Rs/kg)
    Cost
    (Rs)
    Material Used 200 10 2,000 500 10 5,000 524 10 5,240

    The actual output (24 units) is not equal to either the standard output (10 units) or the budgeted output (25 units).
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