It is estimated that for producing one unit of product 'Y' 5 kgs of material are consumed. The standard price per kg of material is Rs. 1.50. During the month of October 7000 kgs of material @ Rs. 1.60 per kg were used for producing 1500 units of 'Y'. Calculate material cost variance, material price variance and material usage variance:

Question

Accepted Answer

The correct option is 3:
The calculation of material variances is a core technique in standard costing, designed to help management understand the causes of cost differences. To arrive at the correct answer, we must first determine the standard quantity of material required for the actual production: 1,500 units \* 5 kgs/unit = 7,500 kgs. The variances are then calculated using the standard formulae. The Material Cost Variance (MCV) is the total difference between the standard cost of the actual output (7,500 kgs \* Rs. 1.50 = Rs. 11,250) and the actual cost (7,000 kgs \* Rs. 1.60 = Rs. 11,200). This results in an MCV of Rs. 11,250 - Rs. 11,200 = **Rs. 50 (Favorable)**. The Material Price Variance (MPV) is calculated as (Rs. 1.50 - Rs. 1.60) \* 7,000 kgs, which equals -Rs. 700, or **Rs. 700 (Adverse)**, because the actual price paid was higher than the standard price. Finally, the Material Usage Variance (MUV) is calculated as (7,500 kgs - 7,000 kgs) \* Rs. 1.50, which results in **Rs. 750 (Favorable)**, as less material was consumed than the standard allowed. Thus, the set of variances is Rs. 50 (F), Rs. 700 (A), and Rs. 750 (F).

The incorrect option is 1:
This option incorrectly states the Material Cost Variance (MCV) as Rs. 70 (F) and the Material Usage Variance (MUV) as Rs. 550 (F). The Material Cost Variance is the total variance (MCV = MUV + MPV). The calculated MPV is Rs. 700 (A) and the MUV is Rs. 750 (F), which correctly sum up to Rs. 50 (F). Therefore, Rs. 70 (F) is an incorrect total variance. Furthermore, the Material Usage Variance is calculated based on the difference between the standard quantity (7,500 kgs) and the actual quantity (7,000 kgs) multiplied by the standard price (Rs. 1.50), yielding Rs. 750 (F), not Rs. 550 (F). The MPV value of Rs. 500 (A) is also wrong as the correct variance is Rs. 700 (A).

The incorrect option is 2:
This option incorrectly identifies the nature of all three variances. It suggests the MCV is Adverse (A) at Rs. 70, which is incorrect because the standard cost (Rs. 11,250) is greater than the actual cost (Rs. 11,200), resulting in a Favorable variance of Rs. 50. The Material Price Variance is shown as Favorable (F) at Rs. 500, but since the actual price (Rs. 1.60) is higher than the standard price (Rs. 1.50), the MPV must be Adverse (A). The Material Usage Variance is shown as Adverse (A) at Rs. 550, but since the actual quantity used (7,000 kgs) is less than the standard quantity (7,500 kgs), the MUV must be Favorable (F).

The incorrect option is 4:
This option incorrectly states the MCV as Adverse (A) at Rs. 50 and the MUV as Favorable (F) at Rs. 200. As established, the MCV is actually Rs. 50 Favorable, not Adverse, because the company spent less than the standard expected cost for the actual output. The MUV of Rs. 200 (F) is substantially lower than the correctly calculated MUV of Rs. 750 (F), indicating a significant miscalculation in either the quantity difference or the application of the standard price. The MPV value of Rs. 700 (F) is also incorrect in its nature, as the higher actual price dictates an Adverse variance, not a Favorable one.