- 10 Marks
MA – L2 – Q23 – Advanced Variance Analysis
Question
Tamale Chemicals, based in Tamale, has the following standard cost for producing 9 litres of GreenLube:
- 5 litres of Material X at GH₵0.70 per litre
- 5 litres of Material Y at GH₵0.92 per litre.
There are no inventories of materials, and all material price variances relate to materials used. Actual results showed that 100,000 litres of materials were used during a particular period as follows:
- 45,000 litres of Material X: cost GH₵36,000
- 55,000 litres of Material Y: cost GH₵53,350
During the period, 92,070 litres of GreenLube were produced.
Required:
Calculate the total materials cost variance and analyse it into its price, usage, yield, and mix components.
Answer
| Materials price variances | GH₵ | GH₵ |
|---|---|---|
| 45,000 litres of Material X should cost (× GH₵0.70) | 31,500 | |
| They did cost | 36,000 | |
| Material X price variance | 4,500 (A) | |
| 55,000 litres of Material Y should cost (× GH₵0.92) | 50,600 | |
| They did cost | 53,350 | |
| Material Y price variance | 2,750 (A) | |
| Total material price variances | 7,250 (A) |
Materials usage variance
Standard usage per 9 litres of GreenLube = 10 litres (5X + 5Y)
Standard usage for 92,070 litres = (92,070 / 9) × 10 = 102,300 litres
Actual usage = 100,000 litres
Usage variance in litres = 102,300 – 100,000 = 2,300 litres (F)
Standard weighted average cost per litre = [(5 × GH₵0.70) + (5 × GH₵0.92)] / 10 = GH₵0.81
Usage variance in GH₵ = 2,300 × GH₵0.81 = GH₵1,863 (F)
Materials mix variance
Standard mix for 100,000 litres = 50,000 litres X, 50,000 litres Y
Actual mix = 45,000 litres X, 55,000 litres Y
| Material | Actual usage (litres) | Standard mix (litres) | Mix variance (litres) | Standard price (GH₵) | Mix variance (GH₵) |
|---|---|---|---|---|---|
| X | 45,000 | 50,000 | 5,000 (F) | 0.70 | 3,500 (F) |
| Y | 55,000 | 50,000 | 5,000 (A) | 0.92 | 4,600 (A) |
| Total | 100,000 | 100,000 | 1,100 (A) |
Materials yield variance
Standard yield = 100,000 / 10 = 10,000 batches of 9 litres
Actual yield = 92,070 / 9 = 10,230 batches
Yield variance in batches = 10,230 – 10,000 = 230 (A)
Standard cost per batch = GH₵8.10 (10 litres × GH₵0.81)
Yield variance in GH₵ = 230 × GH₵8.10 = GH₵1,863 (A)
Total materials cost variance
Standard cost for 92,070 litres = (92,070 / 9) × [(5 × GH₵0.70) + (5 × GH₵0.92)] = GH₵82,863
Actual cost = GH₵36,000 + GH₵53,350 = GH₵89,350
Total materials cost variance = GH₵82,863 – GH₵89,350 = GH₵6,487 (A)
Summary
| Variance | GH₵ |
|---|---|
| Materials price variances | 7,250 (A) |
| Materials yield variance | 1,863 (A) |
| Materials mix variance | 1,100 (A) |
| Materials usage variance | 1,863 (F) |
| Total materials cost variance | 6,487 (A) |
- Topic: Advanced Variance Analysis
- Uploader: Salamat Hamid