Variance Analysis

Introduction
○ Variances may be defined as the difference between the ‘actual’ and ‘standard’ or
‘budget’ costs
○ while the ‘variance analysis' is the proms of analyzing variances by subdividing the
total variance in such a way that management can assign responsibility for off
standard performance.
○ This requires an understanding of the principal determinants of results achieved as
variance analysis is nothing more than the isolating of determinants which were
not incorporated into the standard
Variance Analysis
• Variances are classified into the following:
1. Material Variances,
2. Labour Variances,
3. Overhead Variances, and
4. Sales Variances.
Material Variance
In case of materials, the following may be the variances:
• (i) Material Cost Variance,
• (ii) Material Price Variance,
• (iii) Material Usage or Quantity Variance,
• (iv) Material Mix Variance, and
• (v) Material Sub-Uses or Yield Variance
Material Cost Variance
• Material cost variance is the difference between the standard cost of actual
production and the actual cost of materials used
Material Cost Variance = Standard cost of materials – Actual cost of materials used
OR
Material Cost Variance = Material price variance + Material usage or quantity variance
OR
Material Cost Variance = Material price variance + Material mix variance + Material yield
variance
OR
Material Cost Variance = Standard cost of actual output – Actual cost
OR
Material Cost Variance = (Standard quantity for actual output × Standard price) – (Actual
quantity × Actual price)
Problems
• Standard price of material is Rs, 20 per Kg. and Standard usage (or
consumption) =1000 kg. of material
• Actual price of material Rs. 24/-per kg.
• Actual quantity consumed 900 Kgs. of material
Problem 2
• Product A requires 10 kgs of material at the rate of Rs. 4 per kg. The
actual consumption of material for the manufacturing of Product A
came to 12 kgs of Material at the rate of Rs. 4.50 per kg. Calculate
Material Cost Variance.
• The standard material and standard cost per kg of material required
for the production of one unit of Product A is: Material 5kg @ Rs. 5
per kg.
The actual production and related data are:
400 units of Product A, Material used 2200 kgs @ Rs. 4.80 per kg.
Calculate Material Cost Variance
Material Price Variance
• Material Price Variance: It has been defined as ‘that portion of the
direct material cost variance which is due to the standard price
specified and actual price It is calculated as :
• Actual units used x difference between the standard and the actual
Price Paid
MPV= AQ (SP—AP)
Problem
• Standard price of material is Rs, 20 per Kg. and Standard usage (or
consumption) =1000 kg. of material
• Per unit of output 5 Kg. of material
• Actual price of material Rs. 24/-per kg.
• Actual production 200 units
• Actual quantity consumed 900 Kgs. of material
 STANDARD COSTING WITH SOLUTIONS

Question 1: Calculate Material Price Variance and Material Usage

Variance:
Standard (1 FG) Actual (1 FG)
Kg Rate Amount Kg Rate Amount
(`) (`
18,000 10 1,80,000 20,000 12 2,40,000

5,000 20 1,00,000

After analysing, it was found that out of 25,000 unit, 5,000 units were purchased as an
emergency order at higher rate @ ` 20.
Solution:
Material Price Variance = (S.P. – A.P.) × A.S.
= (10 – 12) × 20,000 + (10 – 12) × 5,000
= ` 50,000 (A)
Material Usage Variance = Excess price variance due to
emergency order + (S.Q. – A.Q.) × S.P.
= (12 – 20) × 5,000 + (18,000 – 25,000) × 10
= ` 1,10,000 (A)
Quantity variance
How many units should have been consumed (according to the
standard) and how many have been actually consumed. The difference
shows the usage (or materials efficiency) variance
Standard unit cost (Standard quantity for Actual Output-Actual
quantity)
Material Mix Variance
It is that portion of the material usage variance which is due to the
difference between standard and the actual composition of a mixture.
In other words, this variance arises because the ratio of materials being
changed from the standard ratio set
Material Mix Variance = Standard rate (Standard quantity – Actual
quantity)
Answer
• (Rs. 20 x 1000 Kgs.) - (Rs. 24 x 900 Kgs.)= 1600
• Material Price Variance = 900 kgs.' (Rs. 20 – Rs. 24)
= 900 x 4= Rs.3600 unfavourable
Total usage variance = Rs. 20 (1000 Kgs. 900 Kgs.)
= 20 x 100 = Rs. 2000
Question
• The standard material required manufacturing one unit of product A
is 10 Kg. and the standard price per Kg. of material is ` 2.50. The cost
accounts records, however, reveal that 11,500 Kg. Of materials costing
` 27,600 were used for manufacturing 1,000 units of product A.
Calculate the material cost, material price and material mix variances.