Materials - Revising Standards

Page M3

Revising the Standards

Revising the standard implies changing the standard itself. This may result in the change in either the quantity of material consumed per unit of production or the rate of material per unit. Revision is necessary in some situations where the planned conditions do not exist at the time of implementation of the plan.

Say for example, the organisation has planned to manufacture a product using materials X, Y and Z in equal proportions i.e. in the ratio, 1 : 1 : 1.

Subsequently it is identified that Material X has become scarce and is in short supply and that it would be difficult or costly to obtain Material X to the extent needed at a reasonable price. To overcome this situation, the production plan has been changed to manufacture the product using X, Y and Z in the ratio 1 : 2 : 2.

Actual production has been carried on using the revised plan.

Initial Standard data

Following standard and actual data relates to a particular period.
Standard Actual
for SO
SQ SP SC AQ AP AC
Material X
Material Y
Material Z 		500
500
500 		10
40
30 		5,000
20,000
15,000 		350
600
550 		10
40
30 		3,500
24,000
16,500
Total 1,500 40,000 1,500 44,000
Output 10
SO 		10
AO

Output (_O) is in units, Quantities (_Q) are in kgs, Prices (_P) are in monetary value per unit quantity and Costs (_C) are in monetary values.

Since the actual production (10 units) and the standard production (10 units) are the same, the data can be straight away used for comparing and evaluating variances in quantity and cost.

The data gives us the idea that there is variance in

  • material quantity
    Standard Actual
    Material X
    Material Y
    Material Z     		500
    500
    500     		350
    600
    550
    Total 1,500 1,500
  • material cost
    Standard Actual
    Material X
    Material Y
    Material Z     		5,000
    20,000
    15,000     		3,500
    24,000
    16,500
    Total 40,000 44,000

The conclusion is erroneous because the data does not take into consideration the revision in standard that has been made.

Revised Standard data

Had the revision been considered, the materials X, Y and Z as per the standard should have been 300 kgs, 600 kgs and 600 kgs respectively of a total material of 1,500 kgs. The standard data should be revised to incorporate this change and the revised data should be used for comparison with the actual data.

Data with the revised standard would be:

Standard Actual
for SO
SQ SP SC AQ AP AC
Material X
Material Y
Material Z 		300
600
600 		10
40
30 		3,000
24,000
18,000 		350
600
550 		10
40
30 		3,500
24,000
16,500
Total 1,500 45,000 1,500 44,000
Output 10 units
SO 		10 units
AO

Output (_O) is in units, Quantities (_Q) are in kgs, Prices (_P) are in monetary value per unit quantity and Costs (_C) are in monetary values.

On considering the revised standards we can see that the production was actually carried on with efficiency with regard to overall cost. The cost incurred being 1,000 less ( 45,000 − 44,000) than the standard cost.

  • material quantity
    Standard Actual
    Material X
    Material Y
    Material Z     		300
    600
    600     		350
    600
    550
    Total 1,500 1,500
  • material cost
    Standard Actual
    Material X
    Material Y
    Material Z     		3,000
    24,000
    18,000     		3,500
    24,000
    16,500
    Total 45,000 44,000

Where does this count?

When once a variance is identified, the next logical step is to find out the reasons for variance and then take corrective action. If the revised standards are not considered the organisation may draw wrong conclusions and take action against those who are not really responsible for a variance that actually might not be there or miss noticing inefficiency and take corrective actions.

Here, the actual data compared with the unrevised standard indicates that the cost incurred is more than the standard to the extent of 4,000 whereas there was a saving in cost to the extent of 1,000. This is revealed only when the revised standard has been used for finding out the variances.

Taking another case where the organisation has fixed the standard price for purchasing materials at 125 per unit. The market conditions have changed and it is imperative that the organisation has to make purchases under the revised conditions where the material would cost 150 per kg. In such a situation it would be appropriate to revise the standard price to reflect the current market price of materials so that effective comparisons can be made.

Recalculating Standards vs Revising Standards

Recalculating the standard is needed to enable us to have data which is capable of being used for comparison with the actual data.

In recalculating the standard, we are neither changing the quantity of material per unit nor the price of material per unit. We are only obtaining the data or values for a production level other than the one that is given in the standard.

In majority of the cases in solving problems what the student needs is the recalculated standard and not a revised standard.

We need to revise the standard when there is information relating to the revision. The values relating to the revised standard are the ones to be used as representing the standard data.

Author : The Edifier
Page M5