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Material Cost Variance
The difference between the standard cost of direct materials specified for production and the actual cost of direct materials used in production is known as Direct Material Cost Variance. Material Cost Variance gives an idea of how much more or less cost has been incurred when compared with the standard cost. Thus, Variance Analysis is an important tool to keep a tab on the deviations from the standard set by a company.
Material Cost Variance Formula
Formula for Material Cost Variance = Standard Cost – Actual Cost
Material Cost Variance can be due to less purchase price being paid than the standard or because of change in the quantity of material used. Thus, Material Cost Variance is made up of two components namely; Material Price Variance and Material Usage Variance.
Let us first understand the meaning of Material Price Variance.
Material Price Variance
Material Price Variance is the difference between the standard price and the actual price for the actual quantity of materials used for production. The cause for material price variance can be many including changes in prices, poor purchasing procedures, deficiencies in price negotiation, etc.
Material Price Variance Formula
Material Price Variance can be calculated using the following formula:
MPV = (Standard Price – Actual Price) x Actual Quantity
Let us understand this formula with the help of an example.
Standard | Actual | |
Price | $ 10 per kg. | $ 8 per kg. |
Quantity | 200 kgs. | 150 kgs. |
Here, the Material Price Variance can be calculated as follows:
MPV = (10 – 8) x 150
= 300 (F)
Here (F) stands for favorable. The variance is favorable because the actual price is less than the standard price. In cases where the actual price is more than the standard price, the result is (A) which means adverse.
Let us now understand the meaning of Material Usage Variance.
Material Usage Variance
Material Usage Variance is the difference between the standard quantity specified for actual production and the actual quantity used at the standard purchase price. There can be many reasons for material usage variance including the use of sub-standard or defective products, pilferage, wastage, the differences in material quality, etc.
Material Usage Variance Formula
MUV = (Standard Quantity – Actual Quantity) x Standard Price
With the help of the above example, let us now calculate Material Usage Variance.
MUV = (200 – 150) x 10
= 500 (F)
The result is Favorable, since the standard quantity is more than the actual quantity. In cases where the actual quantity is more than the standard quantity, the result is in (A) which means Adverse.
Conclusion
Material Cost Variance is composed of Material Price Variance and Material Usage Variance. This means Material Cost Variance = Material Price Variance + Material Usage Variance. We can confirm and cross check this equation with the help of our example.
Material Cost Variance Formula
Standard Cost – Actual Cost
In other words, (Standard Quantity x Standard Price) – (Actual Quantity x Actual Price)
= (200 x 10) – (150 x 8)
= 800 (F)
Favorable, since the actual cost is less than the standard cost. If the actual cost is more than the standard cost, the result is Adverse (A).
MCV= MPV + MUV
= 300 (F) +500 (F)
= 800 (F)
Reference
- http://www.yourarticlelibrary.com/cost-accounting/variance-analysis/variance-analysis-meaning-classification-and-computation/62350/
- http://www.tutorsonnet.com/material-variances-homework-help.php
- http://www.accountingnotes.net/cost-accounting/standard-costing/4-major-types-of-variance-analysis-cost-accountancy/4796
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very good explanation