# Material Variances :: Overview

 Interpretation of Variance

#### Mathematical Interpretation

The variances that we calculate are all value variances i.e. any Variance that we calculate is the difference between two values.
Variance = Value1 − Value2
Variance = (Quantity1 × Price1) − (Quantity2 × Price2)   [Since Value = Quantity × Price.]

The variance is said to be either negative (−) or Adverse (Adv) or Unfavourable (Unf) if it indicates a loss.

• In relation to costs, we would incur a loss if the actual cost is greater than the standard cost.
• In relation to profits or incomes, we would incur a loss if the actual profit or income is less than the standard.

This type of variance is indicated by either a negative sign (−) placed before the value of the variance or by writing the letters UF or Unf or Adv after the value.

#### Positive/Favourable Variance

The variance is said to be either Positive (+/Pos) or Favourable (Fav) if it indicates a gain position or beneficial position.
• In relation to costs, we would gain if the actual cost is less than the standard cost.
• In relation to profits or incomes, we would gain if the actual profit or income is greater than the standard.

This type of variance is indicated by either a positive sign (+) placed before the value of the variance or by writing the letters Fav or F or Pos after the value.

 Variance Formulae » Standard − Actual (Or) Actual − Standard ??
Many a times students would get struck up with deciding whether the standard data comes first or the actual data. The basic idea behind all variances being Variance = Value 1 − Value 2, the standard value should come first in case of cost variances and the actual value should come first in case of sales variances.

To have a clear understanding assume an example and spend a few seconds to think over and decide every time you are in doubt. Never mug it up. The below explanation is given as an aid.

 Sstandard cost is Rs. 2,000 and the actual cost is Rs. 2,400. This should indicate a negative variance. How do you get a negative sign? 2,400 − 2,000 or 2,000 − 2,400. Surely, it would be 2,000 − 2,400 Thus it should be Standard Cost − Actual Cost.

 Standard income is Rs. 2,500 and the actual income is Rs. 3,000. This should indicate a positive variance. How do you get a positive sign? 2,500 − 3,000 or 3,000 − 2,500. Surely, it would be 3,000 − 2,500 Thus it should be Actual Income − Standard Income.

 Material Variances
The variance in the cost of materials i.e. the difference between the standard cost of materials for actual output and the actual cost of materials would give the variance on account of materials. We call this the "Material Cost Variance".

This would give an idea of how much more or less cost had been incurred when the actuals are compared to plans. However, it does not give a scope for pin pointing the responsibility for the variance and thereby take corrective actions.

We cannot identify whether the variance is on account of more or less purchase price being paid (in which case, the purchases department should be held responsible) or on account of more or less quantity of materials being used (in which case the production department should be held responsible) etc.

Therefore to enable derivation of data that would be useful, material cost variance is analysed further into its constituent parts.

 Material Cost Variance as a Synthesis of its Constituent Variances
The analysis of material cost variance into its constituent parts gives an idea of the material variance in various other angles. This possibility for anlaysis arises on account of the fact that material cost is a product of (thereby is influence by) two factors, i.e. the quantity of materials and the price of materials .

All the variances involving materials which are collectively called "Material variances" and their inter relationships are depicted in the illustration below:

MCV
Material Cost Variance
|
 MPV Material Price Variance MUV/MQVMaterial Usage VarianceMaterial Quantity Variance|
 MYV/MSUVMaterial Yield VarianceMaterial Sub Usage Variance MMVMaterial Mix Variance

This can be understood as the "Material Cost Variance" broken down into its constituent parts and the constituent parts further broken down wherever possible.

#### Inter-relationships

The inter-relationships as can be interpreted from the above illustration are

 • MCV = MPV + MUV/MQV   → (1) • MUV/MQV = MMV + MYV/MSUV   → (2) • MCV = MPV + MMV + MYV/MSUV   → (3) [From (1) and (2)]

These inter-relationships can be useful in problem solving for deriving the required answers as well as in checking for the correctness of answers.

 Author Credit : The Edifier ... Continued Page M:6