# Material Variances :: Reconciliation

 Reconciliation

Reconcile = Getting two things to correspond/agree.

With respect to this topic, it is the process of ensuring that the standard and actual data agree after taking into consideration the data relating to the variances.

In this process we prepare a reconciliation statement.

#### What to Reconcile?

We reconcile the standard and actual costs. If we go through the formulae for all the material variances, we come across various standard and actual values.

We can reconcile any two values whose difference is a variance.
Eg:
 Material Usage/Quantity Variance = Standard Cost of Standard Quantity − Standard Cost of Actual Quantity
 ⇒ MQV/MUV = SC of SQ − SC of AQ = (SQ × SP) − (AQ ×SP)
We can reconcile the standard cost of standard quantity and the standard cost of actual quantity.

#### Reconciliation may involve data relating to one or more variances

The reconciliation between two costs/values may involve the data relating to
1. A single variance (which would be that variance which is the difference of the two costs/values)
Eg: In reconciling the "SC of SQ" and "SC of AQ", we may use the data relating to MUV/MQV [Since MQV/MUV = SC of SQ − SC of AQ]
2. More than one variance (which would be those variances in whose terms the difference of the two costs/values is defined.)
Eg: In reconciling the "SC of SQ" and "SC of AQ", we may use the data relating to MCV and MPV. MCV = MPV + MQV/MUV ⇒ MCV − MPV = MQV/MUV ⇒ MCV − MPV = SC of SQ − SC of AQ   [Since, MQV/MUV = SC of SQ − SC of AQ] In reconciling the "SC of SQ" and "SC of AQ", we may use the data relating to MMV and MYV. MQV/MUV = MMV + MYV ⇒ MMV + MYV = MQV/MUV ⇒ MMV + MYV = SC of SQ − SC of AQ   [Since, MQV/MUV = SC of SQ − SC of AQ]

 How to Reconcile? The Method
Preparation of a reconciliation statement requires you to start with one of the two costs/values you intend to reconcile and arrive at the other cost/value by adjusting (adding or subtracting) the variances involved.

You may follow the following steps to create the format for the statement.

1. #### Consider the two costs/values you intend to reconcile

Say, SC of SQ for AO (Standard Cost of Standard Quantity for Actual Output) and AC » (Actual Cost)

2. #### Identify the formula involving these two costs and a variance

The variance would be the difference of the two costs that you have to reconcile.

If you are considering SC of SQ for AO and AC, then it would be

• MCV = (SC of SQ for AO) − AC.

3. #### Make the Cost you have to arrive at, the Subject of the Formula

The subject of a formula is that variable which is defined in terms of the other variables in the formula. By convention we place the subject on the LHS with a positive sign.
1. MCV = (SC of SQ for AO) − AC     ⇒ MCV is the Subject
2. AC = (SC of SQ for AO) − MCV     ⇒ AC is the Subject
3. SC of SQ for AO = MCV + AC     ⇒ SC of SQ for AO is the Subject

In making reconciliation statements we start with one cost/value and make adjustments to arrive at another cost/value. The cost other than the cost that you start with would be made the subject of the formula.

Say, if we are to start with "SC of SQ for AO" and arrive at "AC" then the rewritten formula would be

• AC = (SC of SQ for AO) − MCV

Alternatively, if we are to start with "AC" and arrive at "SC of SQ for AO" then the rewritten formula would be

• SC of SQ for AO = AC + MCV

4. #### Draw the Statement using the rewritten formula

The logical flow of the statement from top to bottom can be interpreted from the terms on the RHS of the re-written formula.
1. #### (SC of SQ for AO) − MCV = AC

Statement of reconciliation
ParticularsAmountAmount
Standard Cost (of Standard Quantity for Actual Output) xx
(Less/(−))Material Cost Variance xx
Actual Cost xx

#### Note:

The Negative sign indicating deduction here is distinct from the sign that you attribute to Cost variance at the time of finding the variance. The Cost Variance should be considered along with its sign (+ if it is positive and − if it is negative).

Where there are two or more materials involved in the production process
Statement of reconciliation of Material Cost
ParticularsAmountAmount
Standard Cost (of Standard Quantity for Actual Output) xx
(Less/(−)) Material Cost Variance: xx
Material Axx
Material Bxxxxx
Actual Cost xx

2. #### SC of SQ for AO = AC + MCV

Statement of reconciliation
ParticularsAmountAmount
Actual Cost xx
(Add/(+))Material Cost Variance xx
Standard Cost (of Standard Quantity for Actual Output) xx

Where there are two or more materials involved in the production process
Statement of reconciliation of Material Cost
ParticularsAmountAmount
Actual Cost xx
(Add/(+)) Material Cost Variance: xx
Material Xxx
Material Yxx
Material Zxxxxx
Standard Cost (of Standard Quantity for Actual Output) xx

#### Note:

The Positive sign indicating addition here is distinct from the sign that you attribute to Cost variance at the time of finding the variance. The Cost Variance should be considered along with its sign (+ if it is positive and − if it is negative).

This is the method adopted for reconciling the costs with the help of data relating to one variance. The variance that we use would be the difference of the two costs given.

 Reconciliation using Data Relating to More than one variance
You may follow the following steps to create the format for the statement.
1. #### Consider the two costs/values you intend to reconcile

Say, SC of AQ (Standard Cost of Actual Quantity) and AC » (Actual Cost)

2. #### Identify the formula involving these two costs and a variance

The variance would be the difference of the two costs that you have to reconcile.

If you are considering SC of AQ and AC, then it would be

• MPV = (SC of AQ) − AC.

3. #### Rewrite the variance in terms of other variances whose data is known

To be able to do this, we need to know the interrelationships between the variances. We need to identify the relationship which gives the variance in terms of the variances whose data is given.

MCV = MPV + MUV/MQV     ⇒ MPV = MCV − MUV/MQV.
Thus,

• MPV = (SC of AQ) − AC.
⇒ MCV − MUV/MQV = (SC of AQ) − AC.

4. #### Make the Cost you have to arrive at, the Subject of the Formula

The subject of a formula is that variable which is defined in terms of the other variables in the formula. By convention we place the subject on the LHS with a positive sign.

In making reconciliation statements we start with one cost/value and make adjustments to arrive at another cost/value. The cost other than the cost that you start with would be made the subject of the formula.

If we are to start with "SC of AQ" and arrive at "AC" then the rewritten formula would be

• AC = (SC of AQ) − MCV + MUV/MQV     ⇒ SC of AQ is the Subject of the Formula

If we are to start with "AC" and arrive at "SC of AQ" then the rewritten formula would be

• (SC of AQ) = MCV − MUV/MQV + AC     ⇒ SC of AQ is the Subject of the Formula

5. #### Draw the Statement using the rewritten formula

The logical flow of the statement from top to bottom can be interpreted from the terms on the RHS of the re-written formula.
1. (SC of AQ) = MCV − MUV/MQV + AC
⇒ (SC of AQ) = AC + MCV − MUV/MQV

#### (SC of AQ) = AC + MCV − MUV/MQV

Statement of reconciliation
ParticularsAmountAmount
Actual Cost  xx
(Add/(+;)) Material Cost Variance:
Material Axx
Material Bxxxxx
(Less/(−)) Material Usage/Quantity Variance: xx
Material Axx
Material Bxxxxx
Standard Cost of Actual Quantity xx

#### Note:

The Positive/Negative signs indicating addition/deduction here is distinct from the sign that you attribute to variances at the time of finding the variance. The Variances should be considered along with their sign (+ if it is positive and − if it is negative).

 Costs to Reconcile » Variances to be Considered
 The variance that you take into consideration is that variance which can be obtained as a difference of the two costs that you have to reconcile. MCV = (SC of SQ for AO) − AC SC of SQ for AO » Standard Cost of Standard Quantity for Actual Output AC » Actual Cost MCV » Material Cost Variance MPV = (SC of AQ) − AC SC of AQ » Standard Cost of Actual Quantity AC » Actual Cost MPV » Material Price Variance MUV/MQV = (SC of SQ for AO) − (SC of AQ) SC of SQ for AO » Standard Cost of Standard Quantity for Actual Output SC of AQ » Standard Cost of Actual Quantity MUV/MQV » Material Usage/Quantity Variance MMV = (SC of SQ for AI) − (SC of AQ) SC of SQ for AI » Standard Cost of Standard Quantity for Actual Input SC of AQ » Standard Cost of Actual Quantity MMV » Material Mix Variance MYV = (SC of SO for AI) − (SC of AO) SC of SQ for AI » Standard Cost of Standard Quantity for Actual Input SC of AO » Standard Cost of Actual Output MYV/MSUV » Material Yield/Sub-Usage Variance
 Author Credit : The Edifier ... Continued Page M:15

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