Material Variances :: Reconciliation

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. 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) 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. 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. MCV = (SC of SQ for AO) − AC     ⇒ MCV is the Subject AC = (SC of SQ for AO) − MCV     ⇒ AC is the Subject 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 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. (SC of SQ for AO) − MCV = AC Statement of reconciliation Particulars Amount Amount 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 Particulars Amount Amount Standard Cost (of Standard Quantity for Actual Output)   xx (Less/(−)) Material Cost Variance:   xx Material A xx   Material B xx xxx Actual Cost   xx SC of SQ for AO = AC + MCV Statement of reconciliation Particulars Amount Amount 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 Particulars Amount Amount Actual Cost   xx (Add/(+)) Material Cost Variance:   xx Material X xx   Material Y xx   Material Z xx xxx 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. Consider the two costs/values you intend to reconcile Say, SC of AQ (Standard Cost of Actual Quantity) and AC » (Actual Cost) 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. 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. 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 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. (SC of AQ) = MCV − MUV/MQV + AC ⇒ (SC of AQ) = AC + MCV − MUV/MQV (SC of AQ) = AC + MCV − MUV/MQV Statement of reconciliation Particulars Amount Amount Actual Cost   xx (Add/(+;)) Material Cost Variance:     Material A xx   Material B xx xxx (Less/(−)) Material Usage/Quantity Variance:   xx Material A xx   Material B xx xxx 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

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