Analysis of Variance - Material variance

Analysis of Variance:-

Control is a very important function of management analysis of variances is helpful in controlling the performance and achieving the profits that have been planned.

The deviation of the actual cost or profit or sales from the standard cost or profit or sales is known as “variance”.

1. Material variance:

In case of Materials, the following may be the variances:-

Material cost variance

i. Material price variance
ii. Material usage or quantity variance
a) Material Mix variance
b) Material yield variance

Material cost variance (MCV)

It is the difference between the standard cost of materials allowed (as per standards laid down) for the output achieved and the actual cost of materials used.

Material cost variance :

standard cost of materials for actual output.- Actual cost of materials used.

Material price variance (MPV)

It is that portion of the material cost variance which is due to the difference between the standard cost of materials used for the output achieved and the actual cost of materials used.

Material price variance = actual usage (standard unit price – actual unit price)

Here, actual usage = actual quantity of materials (in units) used

Standard unit priced = standard price of material per unit

Actual unit price = actual price of material per unit.

c) Material usage (or quantity) variance (MQV)

It is that portion of the material cost variance which is due to the difference between the standard quantity of materials specified for the actual output and the actual quantity of materials used.

Material usage variance = standard price per unit (standard quantity – actual quantity)

d) Material Mix variance (MMV):

It is that portion of the material usage variance which is due to the difference between standard and the actual composition of a mixture. It is calculated as the difference between the standard price of standard mix and standard price of actual mix.

i. Actual weight of mix and the standard weight of mix do not differ:-

Material mix variance is calculated with the help of the following formula:

Standard unit cost (standard quantity – actual quantity)

(Or)

Standard cost of standard mix – standard cost of actual mix.

If the standard is revised due to shortage of a particular type of material, the MMV is calculated as follows:

Standard unit cost (revised standard quantity – actual quantity)

(Or)

Standard cost of revised standard mix – standard cost of actual mix.

e) Material yield variance (MYV):

It is that portion of the material usage variance which is due to the difference between the standard yield specified and the actual yield obtained.

(i) When standard and actual mix does not differ:-

In such a case, yield variance is calculated with the help of the following formula:-

Yield variance = standard rate (actual yield – standard yield)

Standard cost of standard mix

Where standard rate = ----------------------------------------

Net stand output (i.e., Gross output – standard loss)

(ii) When actual mix differs from standard mix:-

In such a case, formula for the calculation of yield variance is almost the same.

Standard rate = standard cost of revised standard mix

---------------------------------------------

Net standard output

Formula for yield variance in such a case is:-

Yield variance = standard rate (actual yield – revised standard yield).