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. Formula for Material Cost Variance = Standard Cost – Actual Cost Table of Contents Material Cost Variance can be due to less purchase price being paid than the standard or because of a change in the quantity of material used. Thus, Material Cost Variance consists of two components: Material Price Variance and Material Usage Variance. Material Cost Variance FormulaStandard 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) Let us first understand the meaning of Material Price Variance. Material Price VarianceMaterial 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 FormulaThe calculation of Material Price Variance using the following formula is as follows: MPV = (Standard Price – Actual Price) x Actual Quantity Let us understand this formula with the help of an example.
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. For a quick calculation, refer to Material Price Variance Calculator Let us now understand the meaning of Material Usage Variance. Material Usage VarianceMaterial 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, differences in material quality, etc. Material Usage Variance FormulaMUV = (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. Keep reading Direct Materials Quantity / Usage / Volume Variance ConclusionMaterial 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. Refer to Material Yield Variance and Material Mix Variance. Frequently Asked Questions (FAQs)What is material cost variance? Material cost variance is the difference between the standard cost of direct material and the actual cost of direct material used in production. What is the formula of material price variance? MPV = (Standard Price – Actual Price) x Actual Quantity How is material usage variance calculated? The formula for
calculating the material usage variance is: RELATED POSTS
Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms". What is the difference between standard quantity and actual quantity?Quantity standards indicate how much of an input, such as labor time or raw materials, should be used in manufacturing a unit of product or in providing a unit of service. To measure performance, actual quantities used are compared to standard quantities allowed.
Is the difference between standard price and actual price for actual quantity of materials used for production?Material Price Variance is the difference between the standard price and the actual price for the actual quantity of materials used for production.
What is the variation in the use of materials at actual prices and use of materials at standard prices?A Material Price Variance (MPV) occurs when the actual price paid for materials used in production is different than the standard price for the materials. The Material Price Variance will be favorable if the actual price paid for the materials is less than the standard price.
What is the difference between the standard cost of materials for the actual output and the actual cost of materials used for producing actual output?The direct material variance is the difference between the standard cost of materials resulting from production activities and the actual costs incurred.
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Is determined by difference found between the standard quantity and the use of actual quantity?
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