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I have watched all the F2 lectures on this and got most of the answers that I had problems with (thanks to you) but I could not get the answer to this problem.
budgeted cost = (BQ x SP)
actual cost = (AQ x AP)
standard cost = (SQ x SP)
standard cost with actual production = (AQ x SP)In material price variance we simply take the difference between total actual cost against total standard cost with actual production.
BUT in material usage variance we simply take the difference between total standard cost against total standard cost with actual production.
Is there a difference between standard cost (SQ x SP) and standard cost with actual production (AQ x SP)?
Do not simply learn this as formulas. The examiner always designs questions to check that you understand what is happening and not just learned formulas.
The total material variance is the difference between the actual total cost and the standard cost of the actual production.
There are two reasons for there to be a difference. One is that we have used the wrong quantity of material and the other is that we paid the wrong amount per kg of material.
To split the total variance into the two reasons, we check whether the actual amount used for the production was right or not (assuming the we did pay the correct amount per kg). So we compare the actual kgs used at standard cost per kg with the standard kgs that should have been used for the actual production costed at standard cost per kg.. This gives us the materials usage variance.
Having dealt with the fact that the kgs used may have been too much or too little, we then check whether or not we paid the correct price for the kgs that we actually used. So we compare the actual kgs used at actual cost per kg with the actual kgs used at standard cost per kg. This gives us the materials expenditure variance.
Thanks for explaining it 🙂
Using example 1 of chapter 13 of the notes
Material Price variance:
actual cost with actual production (AQ x AP) = 35464 kg x $4.50 = 163455
standard cost with actual production (AQ x SP) = 35464 kg x $4.50 = 159588
Difference = $3867 (A)Material Usage variance:
standard cost with actual production (AQ x SP) = 35464 kg x $4.50 = 159588
standard cost with standard production (SQ x SP) = 35464 kg x $4.50 = 160200
Difference = $612 (F)As you can see that when we multiply SQ with SP then we have a total cost of $160200 and it is called standard cost with standard production.
My calculation and what I have written is correct?
Although you have ended up with the correct variances, you have written “35464 kg x $4.50” four times and written it as being equal to three different amounts!!
The correct workings are as I show in my lectures and as are printed in the answer section of the lecture notes.
Sorry, it was a typing mistake.
Material Price variance:
actual cost with actual production (AQ x AP) = 35464 kg x $4.60 = 163455
standard cost with actual production (AQ x SP) = 35464 kg x $4.50 = 159588
difference = $3867 (A)Material Usage variance:
standard cost with actual production (AQ x SP) = 35464 kg x $4.50 = 159588
standard cost with standard production (SQ x SP) = 35600 kg x $4.50 = 160200
difference = $612 (F)Is it correct now?
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