High School

A company manufactures a single product. The standard mix is as follows:

- Material A: 60% at ₹20 per kg
- Material B: 40% at ₹10 per kg

Normal loss in production is 20% of input. Due to a shortage of Material A, the standard mix was changed.

The actual results for February 2001 were:

- Material A: 105 kg at ₹20 per kg
- Material B: 95 kg at ₹9 per kg
- Actual Output: 165 kg

Calculate the various material variances.

Answer :

To calculate the material variances, we first need to understand some concepts in variance analysis. Variance analysis in cost accounting helps in controlling costs by analyzing the differences between actual costs and standard costs.

Steps to Calculate Material Variances:

  1. Standard Quantity and Cost Calculation:

    • Standard Mix:
      • Material A should be 60% of the total input.
      • Material B should be 40% of the total input.
    • Standard Cost:
      • Material A is priced at [tex]₹20[/tex] per kg.
      • Material B is priced at [tex]₹10[/tex] per kg.
    • Normal Loss: There is a 20% normal loss in the production process.

  2. Determine Inputs and Outputs:

    • Actual Input: Total actual input is [tex]105 \text{ kg of A} + 95 \text{ kg of B} = 200 \text{ kg}[/tex].
    • Actual Output: It's given as [tex]165 \text{ kg}[/tex].

  3. Standard Input for Actual Output:

    • Output after loss is calculated as follows:
      [tex]\text{If 100 units of input produce 80 units of output, then 165 kg of output needs } \left( \frac{165}{0.80} \right) \approx 206.25 \text{ kg of input.}[/tex]

  4. Standard Mix for Inputs:

    • Material A = [tex]60\% \times 206.25 \text{ kg} = 123.75 \text{ kg}[/tex].
    • Material B = [tex]40\% \times 206.25 \text{ kg} = 82.50 \text{ kg}[/tex].

  5. Calculate Material Price Variance (MPV):

    • For Material A:
      [tex]\text{MPV} = (\text{Standard Price} - \text{Actual Price}) \times \text{Actual Quantity}
      = (20 - 20) \times 105 = 0.[/tex]
    • For Material B:
      [tex]\text{MPV} = (10 - 9) \times 95 = \text{₹95 favorable}.[/tex]

  6. Calculate Material Usage Variance (MUV):

    • For Material A:
      [tex]\text{MUV} = (\text{Standard Quantity for Actual Output} - \text{Actual Quantity}) \times \text{Standard Price}
      = (123.75 - 105) \times 20 = \text{₹375 unfavorable}.[/tex]
    • For Material B:
      [tex]\text{MUV} = (82.50 - 95) \times 10 = \text{₹125 unfavorable}.[/tex]

  7. Total Material Variance:

    • Total Material Variance = MPV + MUV
    • Total for Material A: [tex]0 + 375 = \text{₹375 unfavorable}[/tex].
    • Total for Material B: [tex]95 + 125 = \text{₹30 unfavorable}[/tex].

By following these calculations, the variances help in identifying whether costs were managed effectively, and if there are areas that need more focus for cost control in material procurement and usage.

Other Questions