Material Cost Variances

Materials cost variance is the difference between the standard cost of materials specified and the actual cost of materials used.

Material Cost Variance= Standard Cost of Material for Actual Output – Actual Cost of Materials Used

OR

(TSC – TAC)

OR

(SQ × SP) – (AQ × AP)

Material cost variances arise due to variation in the price of the material or in its usage. In accordance with this, material cost variances may be analyzed under two heads, viz. material price variance and material usage variance.

Material Price Variance

This is that portion of the material cost variance which is due to the difference between the standard price specified and the actual price paid. Material price variance is that portion of the direct materials cost variance which is the difference between the standard price specified and actual price paid for the direct materials used. This is an “incurring” variance. This reflects the extra price paid on the units purchased. While making this calculation standard consumption of units should not be given any consideration. It is computed by multiplying the actual quantity by the difference between the standard price and the actual price. The formula is:

Material Price Variance = Actual Quantity (Standard unit price – Actual unit price)

OR

AQ (SP – AP)

In other words, material price variance is the difference between ‘what it actually cost and what it would have cost if the actual usage had been paid for at the standard price’.

Causes of Material Price Variance

The reasons for material price variance may be one or more of the following:

• Changes in market price of materials used;=
• Changes in quantity of purchase or uneconomical size of purchase order resulting in a different price;
• Failure to obtain cash and/or trade discounts which were provided while setting standards;
• Rush order to meet shortage of supply;
• Failure to take advantage of off-season price, or failure to purchase when price is cheaper;
• Emergency purchase on the request of production/sales manager;
• Changes in issue price due to differences in changes related to store-keeping, materials handling, carriage inward expenses etc.;
• Changes in the amount of taxes and duties;
• Changes in quality or specification of materials purchased;
• Use of substitute material having a higher or lower unit price;
• Changes in the pattern or amount of taxes and duties.

The materials price variance is generally the responsibility of the purchase manager. However, the variance may be ultimately traceable to factors beyond his control like changes in the market price.