Material Price Variance

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Material Price Variance

Accounting
... From Page M:6

Material

Accountant

Variance

A Problem
900 kgs of Material A @ Rs. 15 per kg, 800 kgs of Material B @ Rs. 45/kg and 200 kgs of Material C @ Rs. 85 per kg were planned to be purchased/used for manufacturing 9,500 units. 2,250 kgs of Material A @ Rs. 16 per kg, 1,950 kgs of Material B @ Rs. 42/kg and 550 kgs of Material C @ Rs. 90 per kg were purchased/used actually for manufacturing 22,800 units.
What is the variation in total cost on account of variation in purchase price? This information is provided by the material price variance. The problem data arranged in a working table:

Process Costing Standard Costing

(Variance Analysis)

Funds Flow Cash Flow

Standard
[Production: 9500 units]

Actual
[Production: 22,800 units]

Quantity Price Value/Cost Quantity (kgs) Rs/kg (Rs) (kgs)

Material A Material B Material C 900 800 200 1,900 15 45 85 35 13,500 36,000 17,000 66,500 2,250 1,950 550 4,750

Price Rs/kg
16 42 90 3,348 95

Value/Cost (Rs)
36,000 81,900 49,500 1,67,400
Search Search

Total

You need not calculate the data for SP Mix and AP Mix for the purpose of calculating Material Price Variances.

The Formulae Material Price Variance (MPV)

The variance in the total cost of materials on account of a variation between the standard price (price at which the materials should have been purchased) and the actual price (price at which they have been purchased). It is calculated as the difference between the standard cost of actual materials and the actual cost of materials. ? Material Price Variance = Standard Cost of Actual Quantity of Materials - Actual Cost of Materials = (Actual Quantity Standard Price) - (Actual Quantity Actual Price) ? MPV = (AQ SP) - (AQ AP)

Basic Accounting Process Consignment Accounting Bank Reconciliation Statement Partnership Accounts Final Accounts

Permutations Combinations Probability Theory of Expectation

(Random Variable)

= AQ (SP - AP)
Memorise this general formula for easier recollection (ignoring the specific formulae below)

For each Material Separately

? MPV Mat = (AQ Mat SP Mat) - (AQ Mat AP Mat)

Variance It Cost Price Calculate

= AQ Mat (SP Mat - AP Mat)

For all Materials together [Total Material Price Variance :: TMPV]

When two or more types of materials are used for the manufacture of a product, the total Material Price variance is the sum of the variances measured for each material separately. ? TMPV = MPV A + MPV B + ..... CA CPT CA PE-II CA PCC CA Final CWA Foundation

No Direct Formula
There is no direct formula for calculating the total material price variance. TMPV ? AQ Mix (SP Mix - AP Mix )

http://www.futureaccountant.com/standard-costing-variance-analysis/study-notes/material-price-variance.php[10/6/2013 5:52:47 PM]

Material Price Variance

CWA Inter CWA Final CS Foundation CS Inter CS Final The above formulae for Material Price Variance can be used in all cases i.e. when AO = SO, AO ? SO, SQ Mix = AQ Mix and SQ Mix ? AQ Mix . Standard Price present in the formula is unaffected by standard recalculation. Standard Quantity which changes on recalculating standards is not found in the formula.

MPV Formula interpretation

MPV = 0
Material Price Variance for each material would be zero if the price at which a material is purchased (AP) is the same as its standard price (SP).

TMPV = 0
When more than one type of material is used, the Total Material Price Variance may become zero 1. When the MPV on account of each material is zero, or 2. When the unfavourable variance due to one or more materials is set off by the favourable variance due to one or more other materials. Therefore, it would not be appropriate to conclude that all the materials are bought at the standard rates just because the total MPV is zero. Where the total MPV is zero, you have to verify individual variances before concluding that all the individual variances (MPV's) are zero.

Recalculating Standards does not effect MPV Calculations

Recalculating Standards does not affect the data used for calculating Material Price Variance. The formula for calculating Material Price Variance involves AQ, SP and AP. It does not involve and thus is not influenced by SQ. These data would not change on standards being recalculated either based on the output or input.

SO ? AO and SQ Mix ? AQ Mix

Standard
[Production: 9500 units]

Actual
[Production: 22,800 units]

Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs)
Material A Material B Material C 900 800 200 1,900 15 45 85 13,500 36,000 17,000 66,500 2,250 1,950 550 4,750 16 42 90 36,000 81,900 49,500 1,67,400

Total

Standards Recalculated for the Actual Output

Standard
[Production: 22,800 units]

Actual
[Production: 22,800 units]

Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs)
Material A Material B Material C 2,160 1,920 480 4,560 15 45 85 32,400 86,400 40,800 1,59,600 2,250 1,950 550 4,750 16 42 90 36,000 81,900 49,500 1,67,400

Total

Standards Recalculated for Actual Input

Standard
[Production: 23,750 units]

Actual
[Production: 22,800 units]

Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs)
Material A Material B Material C 2,250 2,000 500 4,750 15 45 85 33,750 90,000 42,500 1,66,250 2,250 1,950 550 4,750 16 42 90 36,000 81,900 49,500 1,67,400

Total

Solution [in all cases]

http://www.futureaccountant.com/standard-costing-variance-analysis/study-notes/material-price-variance.php[10/6/2013 5:52:47 PM]

Material Price Variance

The data that is used for calculating Material Price Variances can be picked up from the working table built with the data given (as it is) or with the data involving recalculated standards based on either the Actual Output or the Actual Input.

MPV = (AQ SP) - (AQ AP) ? MPV = AQ (SP - AP)

Using MPV Mat = AQ Mat (SP Mat - AP Mat) Material Price Variance due to Material A = 2,250 kgs (Rs. 15/kg - Rs. 16/kg) = 2,250 kgs (- Rs. 1/kg) = - Rs. 2,250 Material B = 1,950 kgs (Rs. 45/kg - Rs. 42/kg) = 1,950 kgs (Rs. 3/kg) = + Rs. 5,850 Material C = 550 kgs (Rs. 85/kg - Rs. 90/kg) = 550 kgs (- Rs. 5/kg) = - Rs. 2,750 ? MPV C = - Rs. 2,750 [Adv] ? MPV B = + Rs. 5,850 [Fav] ? MPV A = - Rs. 2,250 [Adv]

Total Material Price Variance = + Rs. 850 [Pos or Fav]

Formulae using Inter-relationships among Variances

MCV = MPV + MUV/MQV ? (1)

? MPV = MCV - MUV/MQV

For each Material Separately

? MPV Mat = MCVMat - MUV/MQV Mat

For All Materials Together

? MPV Mix = MCVMix - MUV/MQV Mix MUV/MQV = MMV + MYV MCV = MPV + MMV + MYV ? (2) ? (3) [From (1) and (2)]

? MPV = MCV - MMV - MYV

For each Material Separately

? MPV Mat = MCVMat - MMV Mat - MYVMat

For All Materials Together

? MPV Mix = MCVMix - MMV Mix - MYVMix

Who is held responsible for the Variance?

Since this variance is on account of the price being more or less than the standard, the people or department responsible for purchasing materials can be held responsible for this variance.

Author Credit : The Edifier

... Continued Page M:8

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