Materials Price Variance - FundsNet

Therefore, Material Cost Variance is made up of two different components basically: Material Quantity Variance and Material Price Variance. Next ... MaterialsPriceVarianceDefinedwithFormula&ExamplesLisaBorgaSeeallarticlesLastUpdated:February11,2022DatePublished:February11,2022InordertounderstandMaterialPriceVariance,wemustfirstunderstandMaterialCostVariance. Materialcostvarianceisakeycomponenttocalculatingthematerialpricevariance.MaterialCostVarianceTheMaterialCostVariance(MCV)comparesthestandardcostthatabusinesspaysforthedirectmaterialsitconsumesaspartofitsproductiontothebusiness’sactualcostofthosedirectmaterials.TheMaterialCostVarianceallowscompaniestoseewhetherthecostthattheyhaveincurredfordirectmaterialsismoreorlessthanthestandardcostofthosedirectmaterials.Therefore,MaterialCostVarianceisagoodwayforabusinesstokeepaneyeonhowmuchthecompanyisdeviatingfromthestandardsthebusinesshasset.FormulaforMCVMaterialCostVariance=StandardCostforActualOutput–ActualCostReasonsForMaterialCostVarianceMaterialcostvariancesmaybecausedbythepurchasepriceabusinessispayingbeinglessthanthestandardpriceorduetoabusinesschangingthequantityofthematerialtheyuse.Therefore,MaterialCostVarianceismadeupoftwodifferentcomponentsbasically:MaterialQuantityVarianceandMaterialPriceVariance.Next,wewilllookatMaterialPriceVariance.MaterialPriceVarianceAMaterialPriceVariance(MPV)occurswhentheactualpricepaidformaterialsusedinproductionisdifferentthanthestandardpriceforthematerials.TheMaterialPriceVariancewillbefavorableiftheactualpricepaidforthematerialsislessthanthestandardprice.Incontrast,ifthepricepaidforthematerialsisgreaterthanthestandardprice,theMaterialPriceVariancewillbeadverse.AMaterialPriceVariancemayoccurforavarietyofreasons,suchasariseinprice,changesintransportationexpenses,sizeoftheorder,orthequalityofmaterialsbeingpurchased,amongothers.MPVFormulaTheFormulausedtocomputeMaterialPriceVarianceis:MaterialPriceVariance=AQ(SP—AP)Where,AQ=ActualQuantitySP=StandardPriceAP=ActualPriceAnexamplemightbehelpfulinunderstandingtheformula. StandardActualPrice$7.00perlb.$5.00perlb. Quantity75lbs50lbsTheMaterialPriceVarianceiscomputedasshownbelow.MPV=($7-$5)x50lbs.=$100(F)The(F)meansthatthereisafavorablevariance.It’sfavorablesincetheactualpricepaidforthematerialwaslowerthanthestandardprice.Hadtheactualpriceforthematerialbeengreaterthanthestandardprice,itwouldhaveresultedinan(A),meaninganadversevariance.Next,wewillexplainwhatMaterialQuantityVarianceisandhowtocomputeit.MaterialQuantityVarianceAMaterialQuantityVariance,alsoknownasMaterialUsageVariance,occurswhenacompanyusesadifferentamountofmaterialforproductionthanthestandardquantitythatshouldhavebeenusedforproduction.TheMaterialQuantityVariancewillbefavorableiftheactualquantityusedislessthanthestandardquantity.Incontrast,theMaterialQuantityVariancewillbeadverseiftheactualquantityusedismorethanthestandardquantity.ThereareanumberofreasonsthatacompanymayhaveaMaterialQuantityVariance.Itcouldbeduetotheft,waste,ordifferencesinmaterialquality,amongothers.FormulaforMaterialQuantityVarianceTheformulaforMaterialQuantityVarianceis:(SQ–AQ)xSP=MaterialQuantityVarianceNow,let’sdoanexampletoshowhowtocomputeMaterialQuantityVariance.MUV=(75lbs.–50lbs.)x$7=$175(F)TheMaterialQuantityVarianceinthisexampleisfavorablebecausethestandardquantityisgreaterthantheactualquantitythatthecompanyused.Theresultwouldhavebeenadversehadtheactualquantityusedbeengreaterthanthestandardquantity.ConclusionMaterialCostVarianceismadeupoftheMaterialQuantityVarianceandtheMaterialPriceVariance.Therefore,MaterialPriceVariance+MaterialQuantityVariance=MaterialCostVariance.Wecancheckthisbydoinganexample.TheformulaforMaterialCostVarianceis:StandardCost–ActualCost=MCVThismeansthatthe(SQxSP)–(AQxAP)=(75lbs.x$7)–(50lbs.x$5)=$525–$250=$275(F)TheMaterialCostVarianceisfavorablebecausetheactualcostpaidislessthanthestandardcost.Iftheactualcostabusinesspaysismorethanthestandardcost,theMaterialCostVarianceisadverse.MCV=MPV+MQV$275(F)=$100(F)+$175(F)ArticleSources&CitationsFundsNetrequiresContributors,WritersandAuthorstousePrimarySourcestosourceandcitetheirwork.TheseSourcesincludeWhitePapers,GovernmentInformation&Data,OriginalReportingandInterviewsfromIndustryExperts.ReputablePublishersarealsosourcedandcitedwhereappropriate.LearnmoreaboutthestandardswefollowinproducingAccurate,UnbiasedandResearchedContentinoureditorialpolicy.HarperCollege"STANDARDCOSTSANDVARIANCEANALYSIS"Page1-19.February11,2022NewJerseyInstituteofTechnology"StandardCostVarianceCalculationsandAnalysis"Page1.February11,2022CollegeofSanMateo"StandardCostsandtheBalancedScorecard"Page1.February11,2022EditorialProcessOurHighlyExperiencedTeamrecommendsProductsorServicesafterthoroughlyresearchingthemtoensureweprovideanunbiased,comprehensivesolutionforyourHomeorBusiness.WeStandbyourReviewsandwhenyouPurchasesomethingwe’veRecommended,thecommissionswereceivehelpsupportourStaffandourResearchProcess.