Accounting Assignment Help With Classification of Material Usage Variance

4.7.1.1 Classification of Material Usage Variance :

When more than one type of material is used in producing a product, the total usage variance will be classified into (a) Material mix Variance and (b) Material Yield Variance. Let us study these two variances in detail:

a) Material Mix Variance: Material Mix Variance may be defined as that portion of the material usage variance which is due to the difference between the standard and actual composition of material mixture. It means that the cause of variance is due to a change in the ratio of actual material mix from the standard material mix. The variance results from a variation in the materials mix used in production. Material mix variance may arise in those industries where a number of raw materials are mixed in order to produce a final product. Examples are chemical industries, rubber industries etc.

Material Mix Variance is calculated as follows:

Material Mix Variance

= (Revised Standard Quantity – Actual Quantity) X Standard Price

or

RSQ = Total AQ X Standard Ratio

where,

Standard Quantity for each

Material Total of actual

Revised Standard Quantity = --------------X Quantities of

Total Standard Quantity for all Materials

Material

If the actual quantity is more than revised standard quantity, an adverse variance will occur and vice versa.

Material mix variance may arise due to the following reasons:

i) Price actually paid for materials differs from standard prices

ii) Delay in supply of raw materials

iii) Non-availability of one or more components of the mix

iv) Non-purchase of materials at proper time

v) Inefficiency in production department to use proper mix

vi) Actual mix may be different from standard mix, etc.

b) Material Yield Variance (MYV) : Material Yield Variance is calculated on the basis of output while the other variance are calculated on the basis of input. The variance is calculated as the difference between the standard output and the actual output. If the actual output is more than the standard output, then the variance would be favourable and vice versa. The formula for material yield variance is as follows:

Material Yield Variance = (Actual Yield – Standard Yield) Standard output price

Where, standard output price is the total standard material cost per unit of output,

Actual Usage of Material

Standard Yield = -------------

Standard Usage per unit of Output

This variance arises in the case of process industries where loss of material is inevitable in the process of production of final product. Therefore, in these industries normal loss is to be taken into account while setting standards. But the actual loss may be different from the normal loss during the process of actual production. This gives rise to the variance in the standard yield. The material yield variance may be caused due to the following reasons:

i) Defective method of operation

ii) Purchase of substandard quantity of material

iii) Lack of proper care in handling

iv) Lack of proper supervision etc.

It should be noted that where several types of materials are used Material Revised Usage Variance (MRUV) and Material Yield Variance (MYV) imply the same thing, though both are computed using different formulae.

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