Registered Posts: 1
Hello,

Im really struggling with a particular question on one of the practice exams for analysing financial performance. It's probably quite straightforward but my brain just can't seem to get it! So some help on how to work out the material usage variance would be greatly appreciated.

A Company purchases and used 200,000 litres of material at a cost of £0.55 per litre. The budgeted production was 22,000 units which requires 220,000 litres of material at a total standard cost of £132,000. The actual production was 19,000 units.

many thanks!

• Registered, Moderator Posts: 2,034
Start by calculating the standard material needed to produce the actual units produced.
The standard litres per unit is 10.
Then calculate the material cost per litre £132,000 divided by 220,000 litres: £0.60.

The actual units produced was 19,000. This means the standard material for actual production is 19,000 x 10 litres = 190,000 litres and the standard cost of this is 190,000 x £0.60 per litre = £114,000

The standard cost of the material used is 200,000 litres x £0.60 = £120,000

In other words we used 10,000 litres more than the standard for 19,000 units. At £0.60 per litre this gives an adverse usage variance of £6,000

Does this help?
Sandy
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Sandy
[email protected]
www.sandyhood.com
• FMAAT Posts: 80
Divide the total standard cost of £132,000 by the 220,000 litres budgeted material to give a standard cost of material of £0.60 per litre
The budgeted usage is 10 litres per unit therefore the actual production of 19,000 should have used 190,000 litres. The actual usage was 200,000 litres which is an adverse variance of 10,000 litres which is multiplied by the standard material cost of £0.60 to give £6,000
• Registered Posts: 28
Hi
1. Divide the budgeted cost of material by the budgeted litres and multiply it by the actual litres. 132000/220000*200000=120000 FLEXED ACTUAL COST

2, Then divide the budgeted cost by budgeted units and multiply it by actual units
132000/22000*19000=114000 FLEXED BUDGET COST

The difference between the two FLEXED FIGURES IS THE VARIANCE
120000-114000=6000

Since the material FLEXED BUDGET COST IS £114000 and the FLEXED ACTUAL COST IS £120000, then the variance is ADVERSE because more money has been spent ie £120000 instead of £114000.

HOPE THIS HELPS