Case Study: Material Usage Variance

Illustration 7: From the following particulars, compute Material cost variance, (b) Material price variance, and (c) Material usage variance

Quantity of materials purchased 5,000 units

Value of materials purchased ` 15,000

Standard quantity of materials required per tonne of output 50 units

Standard rate of material ` 3.50 per unit

Opening stock of materials Nil

Closing stock of materials 700 units

Output during the period 100 tonnes

Solution:

Actual quantity of material purchased = 5,000 units

Value of materials purchased = ` 15,000

Actual price per unit = "`15,000" /"5,000 units" = ` 3 per unit

Standard price = ` 3.50 per unit

Standard quantity = 100 tonnes × 50 units = 5,000 units

Actual quantity of materials required =

Any deviation in the ratio of mix may result in variance. Mix variance measures this variance.

According to CIMA, Terminology, Material mix variance is defined as “that portion of the material usage variance which is due to the difference between standard and actual composition of materials.”

The formula for the calculation of mix variance is:

Material mix variance = (Revised standard quantity – Actual quantity) × Standard price or MMV = (RSQ – AQ) × SP

Revised standard quantity is the standard proportion of total of actual quantities of all the materials used by the organisation. This can be calculated as under:

RSQ = "Standard quantity of one material " /"Total of standard quantities of all materials " × Total of actual quantities of all materials

Illustration 10: From the following data, calculate material mix variance. Also calculate price and usage variances.

Raw material Standard Actual

A 80 units @ ` 100 per unit 100 units @ ` 100 per unit

B 120 units @ ` 80 per unit 120 units @ ` 90 per unit

Total 200 units 220 units

Material Z = (30 – 34.50) × 1,070 = ` (4,815)

∴ MPV = ` (1,260) + ` 2,300 + ` (4,815) = ` (3,775) adverse

Material Usage Variance = (SQ – AQ) × SP

Material X = (800 – 840) × 20 = ` (800)

Material Y = (1,000 – 1,150) × 25 = ` (3,750)

Material Z = (1,200 – 1,070) × 30 = ` 3,900

∴ MUV = ` (800) + ` (3,750) + ` 3,900 = `650 adverse Material Mix Variance = (RSQ – AQ) × SP

Material X = (816 – 840) × 20 = ` (480)

Material Y = (1020 – 1,150) × 25 = ` (3250)

Material Z = (1224 – 1,070) × 30 = ` 4620

∴ MMV = ` (480) + ` (3,250) + ` 4620 = ` 890 adverse

Working Note: Revised Standard Quantity is calculated as follows:

RSQ = "Standard quantity of one material " /"Total of standard quantities of all materials " × Total of actual quantities of all materials

Material X = (800/3,000) × 3060 = 816 units

Material Y = (1,000/3,000) × 3,060 = 1020 units

Material Z = (1,200/3,000) × 3060 = 1224 units Material Yield Variance

For yield variance, certain basic calculations have to be made as follows:

Standard Yield = "Actual usage of materials " /"Standard usage per unit of output" = 3,060/300 = 10.20 units

SOP (Standard material cost per unit of output) = ` 77,000/10 = ` 7,700

Material Yield Variance = (AY – SY) × SOP

MYV = (10 – 10.20) × 7,700 = ± `