Therefore a variance based on quantity purchased is

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Therefore, a variance based on quantity purchased is basically an earlier report than a variance based on quantity actually used. This is quite beneficial from the viewpoint of performance measurement and corrective action. An early report will help the management in measuring the performance so that poor performance can be corrected or good performance can be expanded at an early date. Recognizing material price variances at the time of purchase lets the firm carry all units of the same materials at one price the standard cost of the material, even if the firm did not purchase all units of the materials at the same price. Using one price for the same materials facilities management control and simplifies accounting work. If a direct materials price variance is not recorded until the materials are issued to production, the direct materials are carried on the books at their actual purchase prices. Deviations of actual purchase prices from the standard price may not be known until the direct materials are issued to production. In simple the various reasons for occurrence of Material price variance: Material price variance may be caused by: 1. Materials market price’s fluctuations. 2. Purchasing in lots which are non-standards. 3. Purchasing from suppliers who are located unfavorably, as a result of which additional cost of transportation has been incurred. 4. During transit, excessive shrinkage or losses has arisen. 5. Purchasing from the suppliers other than those who has offered the most favourable terms. 6. On account of delay in payments, cash discount cannot be availed. 7. For the purpose of special handling or faster transportation, additional charges are required to be paid. 8. Purchases on emergency basis- to place rush orders at any price for immediate delivery. 9. Fraud is there in purchases. 10. Due to unavailability of planned materials, substitute material is required to be bought. Example:5 Assuming in Example 1 that material A was purchased at the rate of Rs 10 and material B was purchased at the rate of Rs 21, the material price variance will be as follows:
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316 Materials price variance = (Actual Price Standard Price) x Actual Quantity Material A = (10 10) x 2,050 = Zero Material B = (21 20) x 2,980 = 2980 (un-favourable) Total material price variance = Rs 2980 (un-favourable) The total of materials usage variance and price variance is equal to materials cost variance. II. Labour Variances: Direct labour variances arise when actual labour costs are different from standard labour costs. In analysis of labour costs, the emphasis is on labour rates and labour hours. Labour variances constitute the following: Labour Cost Variance: Labour cost variance denotes the difference between the actual direct wages paid and the standard direct wages specified for the output achieved.
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