Material Variances - Reconciliation

Reconciliation

Reconcile

  • Getting two things to correspond/agree.

Reconciliation

In accounting, reconciliation is the process of ensuring that any two related values agree after taking into consideration the data relating to possible variances.

Theoretically we can reconcile any two values whose relationship can be expressed in the form of a mathematical equation.

What is Reconciled in Variance Analysis?

The idea of reconciliation is used in relation to this topic to reconcile the standard and actual data/costs.

If we go through the formulae for all the material variances, we come across various standard and actual values. The simplest reconciliation is between two values whose difference is a variance.

Eg : We can reconcile Standard Cost of Standard Quantity for Actual Output and Standard Cost of Actual Quantity.

Material Usage/Quantity Variance (MQV/MUV)

= SC(AO) − SC(AQ)

Standard Cost for Actual Output − 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 : MQV/MUV = SC(AO) − SC(AQ)

    In reconciling the Standard Cost for Actual Output [SC(AO)] and Standard Cost of Actual Quantity [SC(AQ)], we may use the data relating to MUV/MQV.

  2. More than one variance (which would be those variances in whose terms the difference of the two costs/values can be expressed)

    Eg : MQV/MUV = SC(AO) − SC(AQ)

    MCV = MPV + MQV/MUV

    ⇒ MCV − MPV = SC(AO) − SC(AQ)

    In reconciling the Standard Cost for Actual Output [SC(AO)] and Standard Cost of Actual Quantity [SC(AQ)], we may use the data relating to MCV and MPV.

    MQV/MUV = MMV + MYV

    ⇒ MMV + MYV = SC(AO) − SC(AQ)

    In reconciling the Standard Cost of Standard Quantity for Actual Output [SC(AO)] and Standard Cost of Actual Quantity [SC(AQ)], we may use the data relating to MMV and MYV.

Reconciliation Statement

The information relating to the two values being reconciled and the reason for the differences between the two values are presented in the form of a statement called the reconciliation statement.

The statement starts with one of the values being reconciled and arrives at the other value by making appropriate adjustments of the reasons for differences

Statement of reconciliation
Particulars Amount Amount
Standard Cost for Actual Output
(−) Material Cost Variance

− 8,140
75,705
− 8,140
Actual Cost   67,565

Deriving the Statement

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

The following steps would help us create the statement.

  1. Consider the two costs/values to be reconciled

    Say, Standard Cost for Actual Output SC(AO) or more specifically Standard Cost of Standard quantity for Actual Output) and Actual Cost (AC)
  2. Identify the formula involving the two costs and a variance

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

    If we are considering SC(AO) and AC, then it would be

    MCV = SC(AO) − AC

  3. Make the Cost 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. For the purpose of deriving the statement, place the subject of the formula on the RHS.

    1. SC(AO) − AC = MCV

      ⇒ MCV is the Subject

    2. SC(AO) − MCV = AC

      ⇒ AC is the Subject

    3. MCV + AC = SC(AO)

      ⇒ SC(AO) is the Subject

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

    Say, if we are to start with SC(AO) and arrive at AC then the rewritten formula would be

    SC(AO) − MCV = AC

    Alternatively, if we are to start with AC and arrive at SC(AO) then the rewritten formula would be

    AC + MCV = SC(AO)

  4. Prepare the Statement based on the rewritten formula

    The logical flow of the statement from top to bottom can be interpreted starting from the first term on the LHS and ending with the term on the RHS of the re-written formula.
    • SC(AO) − MCV = AC

      Statement of reconciliation
      Particulars Amount Amount
      Standard Cost for Actual Output
      (−) Material Cost Variance


      Actual Cost

      Where there are two or more materials involved in the production process we may use the total variance or show the individual variances in its place providing a greater detail.

      Statement of reconciliation
      Particulars Amount Amount
      Standard Cost for Actual Output
      (−) Material Cost Variance
      Material A
      Material B






      Actual Cost

      Note

      The Negative sign indicating deduction here is distinct from the sign that we attribute to Cost variance to indicate its nature i.e. whether it is favourable/favorable or adverse. The Cost Variance should be considered along with its sign (+ if positive and − if negative).
    • AC + MCV = SC(AO)

      Statement of reconciliation
      Particulars Amount Amount
      Actual Cost
      (+) Material Cost Variance


      Standard Cost for Actual Output

      Where there are two or more materials involved in the production process we may use the total variance or show the individual variances in its place providing a greater detail.

      Statement of reconciliation
      Particulars Amount Amount
      Actual Cost
      (+) Material Cost Variance
      Material A
      Material B






      Standard Cost for Actual Output

      Note

      The Positive sign indicating addition here is distinct from the sign that we attribute to Cost variance to indicate its nature i.e. whether it is favourable/favorable or adverse. The Cost Variance should be considered along with its sign (+ if positive and − if negative).

This is the method adopted for reconciling two costs/values using the data relating to a variance which is the difference of the two costs/values being reconciled.

Reconciliation Statement using data relating to more than one variance

The following steps would help us create the statement in cases where there are two or more variances to be considered for reconciliation.
  1. Consider the two costs/values to be reconciled

    Say, Standard Cost for Actual Quantity SC(AQ) and Actual Cost (AC)
  2. Identify the formula involving the two costs and a variance

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

    If we are considering SC(AQ) and AC, then it would be

    MPV = SC(AO) − 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(AQ) − AC

    ⇒ MCV − MUV/MQV = SC(AQ) − AC

  4. Make the Cost 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. For the purpose of deriving the statement, place the subject of the formula on the RHS.

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

    Say, if we are to start with SC(AQ) and arrive at AC then the rewritten formula would be

    SC(AQ) − MCV + MUV/MQV = AC

    ⇒ AC is the Subject of the Formula

    Alternatively, if we are to start with AC and arrive at SC(AQ) then the rewritten formula would be

    AC + MCV − MUV/MQV = SC(AQ)

    ⇒ SC(AQ) is the Subject of the Formula

  5. Prepare the Statement based on the rewritten formula

    The logical flow of the statement from top to bottom can be interpreted starting from the first term on the LHS and ending with the term on the RHS of the re-written formula.
    • AC + MCV − MUV/MQV = SC(AQ)

      Statement of reconciliation
      Particulars Amount Amount
      Actual Cost
      (+) Material Cost Variance
      Material A
      Material B
      (−) Material Quantity/Usage Variance
      Material A
      Material B













      Standard Cost for Actual Quantity

      Note

      The Positive/Negative signs indicating addition/deduction here are distinct from the signs that we attribute to variances to indicate their nature i.e. whether they are favorable or adverse. The Variances should be considered along with their sign (+ if positive and − if negative).

Costs/Values that can be Reconciled - Variances that can be considered

The variance that we take into consideration are the variances which can be obtained as a difference of the two costs/values that we have to reconcile. Since all material variances are difference between two values, we can reconcile any two values whose difference is a variance.
  • MCV = SC(AO) − AC
    • SC(AO) = Standard Cost for Actual Output
    • AC = Actual Cost
    • MCV = Material Cost Variance
  • MPV = SC(AQ) − AC
    • SC(AQ) = Standard Cost of Actual Quantity
    • AC = Actual Cost
    • MPV = Material Price Variance
  • MUV/MQV = SC(AO) − SC(AQ)
    • SC(AO) = Standard Cost for Actual Output
    • SC(AQ) = Standard Cost of Actual Quantity
    • MUV/MQV = Material Usage/Quantity Variance
  • MMV = SC(AI) − (SC of AQ)
    • SC(AI) = Standard Cost of Actual Input
    • SC(AQ) = Standard Cost of Actual Quantity
    • MMV = Material Mix Variance
  • MYV = SC(AI) − SC(AO)
    • SC(AI) = Standard Cost of Actual Input
    • SC(AO) = Standard Cost for Actual Output
    • MYV/MSUV = Material Yield/Sub-Usage Variance