Standard price Rs. 6 per kg, Actual price Rs. 8 per kg, standard quantity 1000 kg, actual quantity used 900 kg. Calculate material cost variance and material usage variance:

Question

Accepted Answer

The correct option is 1:

Material variance analysis is a critical component of standard costing, helping management pinpoint the causes of differences between expected and actual material costs. The question requires calculating two key variances: Material Cost Variance (MCV) and Material Usage Variance (MUV). The Material Cost Variance measures the overall difference between the standard cost for the standard quantity and the actual cost for the actual quantity used. Using the formula: MCV = (Standard Quantity x Standard Price) - (Actual Quantity x Actual Price), we get (1,000 kg x Rs. 6) - (900 kg x Rs. 8) = Rs. 6,000 - Rs. 7,200 = -Rs. 1,200. Since the actual cost (Rs. 7,200) is higher than the standard cost (Rs. 6,000), the variance is Adverse (A). The Material Usage Variance measures the cost difference due to the variation between the standard quantity and the actual quantity consumed, priced at the Standard Price. The formula is: MUV = (Standard Quantity - Actual Quantity) x Standard Price, which gives (1,000 kg - 900 kg) x Rs. 6 = 100 kg x Rs. 6 = Rs. 600. Because less material was used than planned (900 kg < 1,000 kg), the variance is Favourable (F). Therefore, the correct results are Rs. 1,200 (A) and Rs. 600 (F).

The incorrect option is 2:
This option provides 600 (A) and 1200 (F), which incorrectly swaps the values of the two calculated variances. The Material Cost Variance is Rs. 1,200 Adverse, and the Material Usage Variance is Rs. 600 Favourable. Calculating the variances requires careful adherence to the formulas to ensure the correct amount is assigned to the correct type of variance (Cost vs. Usage). If a student mixes up the resulting figures, they might select this option, but it does not reflect the actual calculated values for each specific variance.

The incorrect option is 3:
This option suggests 1200 (F) and 600 (A). While the values of Rs. 1,200 and Rs. 600 are correct, the nature (Adverse or Favourable) of both variances is reversed. The Material Cost Variance is Adverse because the actual total cost (Rs. 7,200) exceeded the standard total cost (Rs. 6,000). Conversely, the Material Usage Variance is Favourable because the actual quantity used (900 kg) was less than the standard quantity (1,000 kg). Incorrectly assigning the 'F' and 'A' status to the variance amounts is a common error in variance analysis.

The incorrect option is 4:
This option, 1000 (A) and 200 (F), shows completely incorrect values for both variances. These figures do not correspond to the Material Cost Variance of Rs. 1,200 (A) or the Material Usage Variance of Rs. 600 (F). The error likely stems from using non-standard or incorrectly adapted formulas. For instance, the Material Price Variance is (SP-AP) x AQ = (6-8) x 900 = Rs. 1,800 (A), which is not Rs. 1,000 (A). Therefore, the amounts presented in this option are mathematically unsound based on the standard formulas and the given data.