Material Variances :: Reconciliation

... From Page M:13
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: A. 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]

    B. 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

♣ Copyright Krishbhavara. All rights reserved ♣ Site optimized for Internet Explorer 5.5 and above