*Standard Costing- Material Variances*

**In standard costing, for specified areas of operational activity, the difference between actual & standard costs is known as variances. Calculation & classification of variances is one of the most important features of standard costing. Classification of variances & disclosure of the same to the management is essential so that it becomes possible for the management to take remedial action & allocate responsibility.**

__Variance Analysis:__

Therefore, the examination of all those influences, as a result of which variances have occurred & identification of the action of the management which is necessary for rectifying matters; constitutes analysis of variances.

Identification of only variance is of no value by itself-the value lies in determining the causes of the variances & taking corrective actions. Generally, in accordance with the principles of responsibility accounting, variance analysis operates; as the cause of variances can be personalized, for example: for labour efficiency variance, responsibility will be on the production foremen; for sales price & sales mix variances, , responsibility will be on the marketing management; for material price variance, responsibility will be on the purchasing department, & so on.

Depending upon the circumstances, variances may be either adverse (A) or favourable (F). When actual costs are less than the standard costs, to view the variances as favourable is logical, similarly, when actual costs exceeds the standard costs, then to view the variances as adverse is logical. But automatically it does not follow that these terms should be equated with good or bad. Only after the causes of variances are known, such an appraisal should be made.

__Cost Variances__**Total Cost Variance:**

The difference between the total standard cost of the output that has been achieved in a period & the total actual cost which has been incurred in a period is known as total cost variance. On actual output & not on standard or budgeted output, all cost variances are based.

__Material Variances:__**Direct Material Cost Variance:**

The difference between the standard cost of direct materials which has been specified for the production that has been achieved & the actual cost of direct materials which are used is known as direct material cost variance.

The formula is:

*Standard Cost-Actual Cost*

As a result of changes in the quantities of materials or the price, the variance may arise. Analysis of material cost variance therefore can be done into two components, viz. (i) material price variance, & (ii) material usage variance.

__(i)Material Price Variance:__The difference in cost which has been resulted from price being different to standard is known as material price variance. Therefore, it is the multiplication of actual usage with the difference in price.

The formula is:

*Actual quantity * Price Difference*

*Or, Actual quantity * (Standard price-Actual price)*

*Or, Actual quantity * Standard price – Actual quantity * Actual price*

*Or, Standard cost of actual quantity – Actual cost*

*Reasons of occurrence of Material price variance:*Material price variance may be caused by:

- Materials market price’s fluctuations.
- Purchasing in lots which are non-standards.
- Purchasing from suppliers who are located unfavorably, as a result of which additional cost of transportation has been incurred.
- During transit, excessive shrinkage or losses has arisen.
- Purchasing from the suppliers other than those who has offered the most favourable terms.
- On account of delay in payments, cash discount cannot be availed.
- For the purpose of special handling or faster transportation, additional charges are required to be paid.
- Purchases on emergency basis- to place rush orders at any price for immediate delivery.
- Fraud is there in purchases.
- Due to unavailability of planned materials, substitute material is required to be bought.

__(ii) Material Usage Variance:__The difference arising between actual usage & expected usage (i.e. for producing the actual output, what should have been used) multiplied by the standard price is known as the material variance.

The formula is:

*Standard price * Usage difference*

*Or, Standard price * (Standard Usage-Actual Usage)*

*Or, Standard price * Standard Usage – Standard price * Actual Usage*

*Or, Standard cost of standard quantity – Standard cost of actual quantity*

*Reasons of occurrence of Material usage variance:*Material usage variance may be caused by:

- Substitution of materials which are non-standard.
- Materials results in variations in yields.
- Changes in product designs, tools, machinery or method of processing which have not yet been recognized in standards.
- Excess materials not returned to the stores.
- Inspection which is too rigid.
- There are no proper tools or machines.
- Inadequately trained, poorly supervised, careless or dissatisfied workmen have caused loss or destruction of materials.
- Machines & tools are not kept in good working conditions.

*Relationship between the variances:**Total material cost variance = Price variance + Usage variance*

__Illustration1:__The following information has been furnished by AB ltd. which has adopted standard costing:

Standard:

Materials for 150 kg finished products 200 Kg

Price of materials $ 4 per kg

Actual:

Output 300000 kg

Materials used 360000 kg

Cost of materials $ 684000

Calculate: (a) Material cost variance; (b) Material price variance & (c) Material usage variance.

__Solution:__Standard quantity of material required for actual output:-

=300000 *

__200__400000 Kg

Actual quantity of material 150 360000 kg

Standard price $ 4 per kg

Actual price =

__684000__$ 1.90 per kg

360000

(a) Material cost variance:

*Standard Cost-Actual Cost*

= (400000*$4) -$ 684000

__$ 916000__Favourable(b) Materials price variance:

*Actual quantity * Price Difference*

= 360000 * (4.00-1.90) $ 756000 Favourable

(c) Material Usage Variance:

*Standard price * Usage difference*

= $4 * (400000-360000)

__$ 160000__Favourable

*Check: Material cost variance = Price + Usage*

__$ 916000__Favourable

__Illustration2:__The standard raw material mix for 500 kg of finished product is:

Material K 250 Kg @ $ 4.00 per kg

Material L 150 Kg @ $ 11.00 per kg

Material M 150 Kg @ $ 6.00 per kg

Material N 50 Kg @ $ 15.00 per kg

During the accounting period, the material used was as follows:

Material K 600 Kg @ $ 4.40 per kg

Material L 390 kg @ $ 12.00 per kg

Material M 400 kg @ $ 5.20 per kg

Material N 130 kg @ $ 14.00 per kg

During the period, production was 1250 Kg. Identify & calculates (a) material cost variance; (b) material price variance; & (b) material price variance; & (c) material usage variance.

__Solution:____Standard input for material for actual output of 1250 kg__= (600/500) * 1250 = 1500 Kg

__Standard Material Cost for Actual Output:__$

K (250/500) * 1250 = 625 kg @ $ 4.00 = 2500

L (150/500) * 1250 = 375 kg @ $ 11.00 = 4125

M (150/500) * 1250 = 375 kg @ $ 6.00 = 2250

N (50/500) * 1250 =

__125 kg__@ $ 15.00=

__1875__

1500 kg input 10750

__(-) 250__kg loss

__-_____

__1250__kg output

__10750__

__Actual Cost:__

K 600 kg * $ 4.40 2640

L 390 kg * $ 12.00 4680

M 400 kg * $ 5.20 2080

N

__130 kg__*$ 14.00

__1820__

1520 kg input 11220

__(-) 270__kg loss

___-______

1250 kg output

__11220__

(a) Material Cost variance:

*Standard cost for actual output – Actual cost*

*$ 10750- $ 11220 $*

__470__(Adverse)(b) Material Price variance:

*Actual quantity * (Standard Price – Actual Price)*

K ($ 4.00-$ 4.40) * 600 = 240 (Adverse)

L ($ 11.00-$ 12.00) * 390 =390 (Adverse)

M ($ 6.00-$ 5.20) * 400 = 320 (Favourable)

N ($ 15.00-$ 14.00) * 130 =

__130__(Favourable)

180 (Adverse) $

**180 (Adverse)**

(c) Material Usage Variance:

*Standard Price * (Standard Usage – Actual Usage)*

K (625-600)* $ 4.00 = 100 (Favourable)

L (375-390) * $11.00= 165 (Adverse)

M (375-400) * $ 6.00 = 150 (Adverse)

N (125-130) * $ 15 =

__75__(Adverse)

290 (Adverse) $

__290__(Adverse)

*Check: Material Cost Variance = Price + Usage*$__470__(Adverse)The material usage variance can be further divided into material mix variance & material sub-usage variance/ material yield variance, where in combination; two or more materials are used.

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