Material Yield Variance : Losses
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Material Yield Variance : Losses ► Variance
► Accounting
► Yield Loss
► Material
... From Page M:10
Losses Based on their nature, Losses are classified into two:
Normal Loss
•
Those losses whose occurrence is inevitable i.e. which occur on account of normal reasons. Normal Loss is valued at its market price or the net realisable value.
•
Standard Costing (Variance Analysis)
•
Abnormal Loss
Process Costing
Funds Flow Cash Flow
Those losses whose occurrence can be avoided i.e. which occur on account of abnormal reasons. Abnormal Loss is valued at cost or its full value.
Ascertaining Output using Loss Data The data relating to output can be ascertained as: Actual Output = Actual Quantity of Actual Mix - Actual Loss
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? AO = AQ Mix - AL Mix Standard Output = Standard Quantity of Standard Mix - Standard Loss
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? SO = SQ Mix - SL Mix
Loss of Mix In dealing with losses in calculating material variances we deal with only loss of mix and not loss of individual materials.
Influence of Losses in calculation of Variances
•
Basic Accounting Process
•
Consignment Accounting
•
Bank Reconciliation Statement
•
Partnership Accounts
•
Final Accounts
•
Permutations Combinations
•
Probability
We use the data relating to the quantity of losses only to ascertain the Standard Output (SO) and Actual Output (AO) if they are not given. If they i.e. SO and AO are known, we can just ignore the data relating to the quantity of losses. The value of loss whether normal or abnormal is not considered in calculating material variances. This is done by considering the SC Mix at its Gross value in calculating the SP(SO). When the standard data includes details relating to the loss it is obvious that it is a "Normal Loss", i.e. the acceptable loss in the production process. The standard price given for the loss indicates the market price for the normal loss (Since, "Normal Loss is valued at Market Price or Net Realisable Value").
•
Theory of Expectation (Random Variable)
The problems involving losses can be classified into two types
Input and Output in same terms
► Yield Data
Problems where Input and Output are in the same terms. [Eg: Input is given in kilograms and the output is also in kilograms.]
► Calculate Yield ► High Yield
Consider the following data arranged in a working table:
Standard
Actual
[Production: ???]
[Production: ???]
Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs) Material X
500
10
5,000
470
11
5,170
Material Y
700
25
17,500
700
24
16,800
•
CA CPT
•
CA PE-II
•
CA PCC
•
CA Final
•
CWA Foundation
Material Yield Variance : Losses
Total Less: Loss @10%
1,200 120
22,500 10
1,200
1,170
21,970
110
Standard Output and the Actual Output are not given. Assuming that the Output would be in the same terms as the input i.e. in kgs, The data relating to output can be ascertained as: Using, AO = AQ Mix - AL Mix • AO = 1,170 kgs - 110 kgs = 1,060 kgs Using, SO = SQ Mix - SL Mix • SO = 1,200 kgs - 120 kg = 1,080 kg Where the data relating to the Standard Output and Actual Output are given, these calculations are not necessary.
Standard
Actual
[Production: 1,080 kg]
[Production: 1,060 kg]
Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs) Material X
500
10
5,000
470
11
5,170
Material Y
700
25
17,500
700
24
16,800
22,500
1,170
1,200
110
22,500
1,060
Total/Gross
1,200
Less: Loss @10%
120
Net
1,080
10
21,970
21,970
Cost Data The data relating to the realisable value of normal loss stock is to be ignored even if it is available (Rs. 1,200 for the standard). The Standard (Gross) Cost of the Mix is Rs. 22,500 and the Standard (Net) Cost of the Mix is Rs. 20,300 (Rs. 22,500 - Rs. 1,200).
SP(SO) =
SCMix SQ Mix
You would be required to calculate the "Standard Price of Output" SP(SO), for which you need the "Standard Cost of Mix" SC Mix . The gross cost should be taken as the cost and not the net cost. To ensure that you do not consider improper data, understand that you need to ignore the data relating to realisable value of normal loss.
Input and Output are in different Terms Problems where Input and Output are in the different terms. [Eg: Input is given in kilograms and the output is expressed in units.]
Standard
Actual
[Production: 2000 units]
[Production: 1800 units]
Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs) Material X
500
10
5,000
470
11
5,170
Material Y
700
25
17,500
700
24
16,800
22,500
1,170
1,200
110
22,500
–
Total
1,200
Less: Loss @10%
120
Net
–
10
21,970
–
The data relating to losses is useful only for the purpose of ascertaining the standard or actual output as needed (if they are not given). If you are given the data relating to the final output (both Standard and Actual), you can ignore the data relating to losses. If you are not given the data relating to outputs, you should be given some relationship between the losses and the outputs so that you would be able to identify the outputs using the data.
SP(SO) =
SCMix SQ Mix
With regard to cost, you shoud consider the Standard (Gross) cost of the mix for calculating the SP(SO).
Why is value of loss ignored Consider the standard data above. In accounting or cost accounting, cost implies the normal cost (Rs. 21,300) which is the total cost (Rs. 22,500) reduced by the realisable value of normal loss (Rs. 1,200). Therefore, the cost incurred for the manufacture of 2,000 units of output should be Rs. 21,300 and not Rs. 22,500. In such a case, in considering the actual data also the value of normal loss relating to the actual input should be eliminated
•
CWA Inter
•
CWA Final
•
CS Foundation
•
CS Inter
•
CS Final
Material Yield Variance : Losses to obtain the normal cost incurred. However, while calculating the Quantity/Usage Variance we consider each material separately which would amount to considering the gross input and the gross cost for calculations. Thereby, when calculating the "Yield Variance" which is a part of the usage variance, we should also ensure that the gross input and the gross cost are taken into consideration by ignoring the data relating to losses. If at all adjustments for normal losses have to be made, they are to be made both for the purpose of calculating the usage/quantity variance and yield variance. This would require us to distribute the normal loss both in terms of quantity as well as value over the three input materials which in itself would be a complicated process and not a perfect one. That is the reason the influence of losses and their realisations is ignored for the purpose of identifying material variances.
The Formulae » Material Yield Variance using Loss data In terms of losses, the Material Yield Variance is the difference between the Standard Cost of Standard Loss for Actual Mix and the Standard Cost of Actual Loss Material yield variance = Standard Cost of Standard Loss for Actual Quantity - Standard Cost of Actual Loss ? TMYV/TMSUV = SC of SLMix for AQ Mix - SC of AL Mix
= ({
= ({
AQ Mix
× SL Mix} × SP(SO)) - (ALMix × SP(SO))
SQ Mix AQ Mix
× SL Mix} - AL Mix) × SP(SO)
SQ Mix
Note: This formula can be used in all cases i.e. both when AQ Mix = SQ Mix as well as when AQ Mix ? SQ Mix . When AQ Mix ? SQ Mix , AQ Mix /SQ Mix works as an adjustment factor to readjust the Standard to Standard for Actual Input.
When AQ Mix = SQ Mix When AQ Mix = SQ Mix,
AQ Mix SQ Mix
becomes 1 thus nullifying its effect, in which case the formula would read as:
In such a case, the formula would read
TMYV/TMSUV = (SL Mix - AL Mix) × SP(SO)
Standard - Actual or Actual - Standard?? Say the actual loss is 200 kgs and the standard loss for actual input is 180 kgs. Does this indicate efficiency or inefficiency? Inefficiency for sure, since the loss was 200 kgs where it should have been 180 kgs. This then should give us a negative variance, which would be possible only if we consider the data in the order "Standard" - "Actual". Be conscious of this, as in calculating material yield variance using outputs we write, we write "Actual" - "Standard".
Solution [Using the data as it is] For working out problems with the data considered as it has been given without having to do any recalculations, use the above formulae (which are capable of being used in all cases) Consider the working table above:
Standard
Actual
[Production: ??? (SO)]
[Production: ??? (AO)]
Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs) Material X
1,500
10
15,000
2,400
11
26,400
Material Y
1.000
25
25,000
1,500
24
36,000
40,000
3,900
Total
2,500
Less: Loss @10%
250
Actual Net
1
250
500
2,250
3,400
Since the output data is not given, we calculate output from the given data. Using,
SO = SQ Mix - SL Mix ? SO = 2,500 kgs - 250 kgs ? SO = 2,250 kgs
62,400
Material Yield Variance : Losses
Using,
AO = AQ Mix - AL Mix ? AO = 3,900 kgs - 500 kgs ? AO = 3,400 kgs Using
SP(SO) =
SCMix
Rs. 40,000
? SP(SO) =
2,250 kgs
SO
160
? SP (SO ) = R s.
9
/kg
Using,
TMYV/TMSUV = ({
AQ Mix SQ Mix
• TMYV/TMSUV = ({
× SLMix} - AL Mix) ×
3,900 kgs 2,500 kgs
SP(SO)
× 250 kgs} - 500 kgs) × Rs.
160
= (390 kgs - 500 kgs) × Rs.
160
= (- 110 kgs) × Rs.
9
9
160 9
/kg
/kg
/kg
= - Rs. 1,955.56 [Adv]
Check: MYV using the formula for output,
MYV = (AO - {
AQ Mix SQ Mix
× SO}) × SP(SO)
• TMYV/TMSUV = (3,400 - {
3,900 kgs 2,500 kgs
× 2,250}) × Rs.
= (3,400 kgs - 3,510 kgs) × Rs.
= (- 110 kgs) × Rs.
160 9
160 9
160 9
/kg
/kg
/kg
= - Rs. 1,955.56 [Adv]
Solution [Using recalculated data] Where you find that the SQ Mix ? AQ Mix , you may alternatively recalculate the standard to make the SQ Mix = AQ Mix and use the figures relating to the recalculated standard in the working table. In such a case, the formulae that you use would look simpler (without the adjustment factor AQ Mix /SQ Mix ). From the data relating to the problem, it is evident that SQ Mix ? AQ Mix . Thus we recalculate the standard data for Actual Input [Refer to the calculations]. Consider the recalculated standard data and the actual data arranged in a working table.
Standard
Actual
[Production: ??? (SO)]
[Production: ??? (AO)]
Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs) Material X
2,340
10
23,400
2,400
11
26,400
Material Y
1.560
25
39,000
1,500
24
36,000
62,400
3,900
Total
3,900
Less: Loss @10%
390
Actual Net
1
390
500
3,510
3,400
Since the output data is not given, we calculate output from the given data. Using,
SO = SQ Mix - SL Mix ? SO = 3,900 kgs - 390 kgs ? SO = 3,510 kgs Using,
AO = AQ Mix - AL Mix ? AO = 3,900 kgs - 500 kgs ? AO = 3,400 kgs
62,400
Material Yield Variance : Losses Using
SP(SO) =
SCMix
? SP(SO) =
SO
Rs. 62,400 3,510 kgs
? SP (SO ) = R s.
160 9
/kg
Using,
TMYV/TMSUV = (SL Mix - AL Mix) × SP(SO) 160
• TMYV/TMSUV = (390 kgs - 500 kgs) × Rs.
160
= (- 110 kgs) × Rs.
9
9
/kg
/kg
= - Rs. 1,955.56 [Adv]
Check: MYV using the formula for output,
MYV = (AO - {
AQ Mix SQ Mix
× SO}) × SP(SO)
• TMYV/TMSUV = (3,400 - {
3,900 kgs 2,500 kgs
× 2,250}) × Rs.
= (3,400 kgs - 3,510 kgs) × Rs.
= (- 110 kgs) × Rs.
160 9
160 9
160 9
/kg
/kg
/kg
= - Rs. 1,955.56 [Adv]
Note: This formula can be used only when AQ Mix = SQ Mix .
You don't need to recalculate the standard The formula with the adjustment factor AQ Mix /SQ Mix can be used in all cases i.e. both when AQ Mix = SQ Mix and AQ Mix ? SQ Mix . Therefore, you don't need to rebuild the working table by recalculating the standards for the purpose of finding the variances.
Check: The same problem was solved in both the cases above. The only difference being that in the second case, the data was considered by recalculating the Standard for Actual Input to make AQ Mix = SQ Mix .
Alternative Formula It is the difference between the Standard Cost of Standard Loss for Actual Output and the Standard Cost of Actual Loss Material yield variance = Standard Cost of Standard Loss for Actual Ouptut - Standard Cost of Actual Loss
MYV = SC of SL for AO - SC of AL = ({
= ({
AO SO AO SO
× SL Mix} × SP Mix) - (ALMix × SP Mix)
× SL Mix} - AL Mix) × SP Mix
Note: This formula can be used in all cases i.e. both when AO = SO as well as when AO ? SO. When AO ? SO, AO/SO works as an adjustment factor to readjust the Standard to Standard for Actual Output. The above formula can be used in all cases i.e. both when AO = SO or when AO ? SO. When AO = SO the factor AO/SO will become 1 thus nullifing its effect. In such a case, both the formula would read
TMYV/TMSUV = (SL Mix - AL Mix) × SP Mix
Standard - Actual or Actual - Standard?? Say the actual loss is 200 kgs and the standard loss for actual input is 180 kgs. Does this indicate efficiency or inefficiency? Inefficiency for sure, since the loss was 200 kgs where it should have been 180 kgs. This then should give us a negative variance which is possible only if we consider the data in the order "Standard" -
Material Yield Variance : Losses "Actual". Be conscious of this, as in calculating material yield variance using outputs we write, we write "Actual" - "Standard".
Solution [Using the data as it is] For working out problems with the data considered as it has been given without having to do any recalculations, use the above formulae (which are capable of being used in all cases) Consider the working table above:
Standard
Actual
[Production: ??? (SO)]
[Production: ??? (AO)]
Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs) Material X
1,500
10
15,000
2,400
11
26,400
Material Y
1.000
25
25,000
1,500
24
36,000
40,000
3,900
Total
2,500
Less: Loss @10%
250
Actual Net
1
62,400
250
500
2,250
3,400
Using,
SP Mix =
SCMix SQ Mix
? SP Mix =
Rs. 40,000 2,500 kgs
? SP Mix = Rs. 16/kg
Using,
TMYV/TMSUV = ({
AO SO
• TMYV/TMSUV = ({
= ({
= ({
= ({
× SL Mix} - AL Mix) × SP Mix
3,400 kgs 2,250 kgs 3,400
× 250 kgs} - 500 kgs) × Rs. 16/kg
kgs} - 500 kgs) × Rs. 16/kg
9
3,400 - 4,500 kgs 9 - 1,100 kgs 9
) × Rs. 16/kg
) × Rs. 16/kg
= - Rs. 1,955.56 [Adv or Unf]
Solution [Using recalculated data] Where you find that the SO ? AO, you may alternatively recalculate the standard to make the SO = AO and use the figures relating to the recalculated standard in the working table. In such a case, the formulae that you use would look simpler (without the adjustment factor AO/SO). From the data relating to the problem, it is evident that SO ? AO. Thus we recalculate the standard data for Actual Input [Refer to the calculations]. Consider the recalculated standard data and the actual data arranged in a working table.
Standard
Actual
[Production: ??? (SO)]
[Production: ??? (AO)]
Quantity Price Value/Cost Quantity Price Value/Cost (kgs) Rs/kg (Rs) (kgs) Rs/kg (Rs) Material X
2,266.67
10
22,667
2,400
11
26,400
Material Y
1,511.11
25
37,778
1,500
24
36,000
60,445
3,900
Total
3,777.78
Less: Loss @10%
377.78
Actual Net
1
390
500
3,400
3,400
62,400
Material Yield Variance : Losses Using,
SP Mix =
SCMix SQ Mix
? SP Mix =
Rs. 60,445 3,777.78 kgs
? SP Mix = Rs. 16/kg
Using,
TMYV/TMSUV = (SL Mix - AL Mix) × SP Mix • TMYV/TMSUV = (377.78 kgs - 500 kgs) × Rs. 16/kg = (- 122.12 kgs) × Rs. 16/kg = - Rs. 1,954 [Adv or Unf] It should have been 1,955.55 the difference being approximation error.
Author Credit : The Edifier
... Continued Page M:12
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