I need to understand variance formulae
Material usage variance is calculated as “quantity differential valued at standard price”.
Quantity differencial is logical but why “standard price” and why not “actual price”.
Similarly, Material price variance is calculated as “price differencial valued at actual quantity”.
price differencial is logical but why “actual quantity” and why not “standard quantity”.
Thanks and regards
We are trying to look at the effect of changes in the two things separately.
So for usage variance, we imagine that all that changes is the usage (and therefore cost out at the standard price).
Having changed the quantity, we now want to look at the effect of paying the wrong price, which is why we cost out using the same (actual) quantity.
(And of course, to convince yourself, the total of the price and usage variances will equal the total materials variance which you can calculate separately (although don’t waste time doing this in the exam))
Thanks for your reply
But why we have started from usage variance and then price variance. I mean to say that if this logic is right then it would make no difference if we say that.
For price variance, we imagine that all that changes is the price (and therefore cost out at the standard quantity).
Having changed the price, we now want to look at the effect of using the wrong quantity, which is why we cost out using the same (actual) price.
Am i thinking right ?
Thanx and regards
You could do it that way round, but the standard way (and the way expected in the exam) is the way I wrote before. (If you did it the other way round, the variances would be different, even though the total would be the same.)
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