Material Variances :: Overview

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/MQV Material Usage Variance Material Quantity Variance | MYV/MSUV Material Yield Variance Material Sub Usage Variance MMV Material 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.

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