Material Variance
Material variance in the context of accounting and cost management is the difference between the actual cost of materials used in production and the standard or budgeted cost of those materials. It is often used in cost accounting to help management understand the efficiency and effectiveness of their purchasing and usage of raw materials.
Material variance can be broken down into two types:
- Material price variance: This is the difference between the actual cost of materials and the standard cost of those materials. This variance may arise due to changes in market prices, discounts or premiums on purchases, or inefficient purchasing practices.
- Material usage variance (or material quantity variance): This is the difference between the actual quantity of materials used in production and the standard quantity of materials that should have been used. This variance may arise due to wastage, theft, inefficiencies in the production process, or changes in the production method.
Positive variances (actual cost less than the standard cost) can indicate cost-saving efficiencies, while negative variances (actual cost more than the standard cost) can point to problems or inefficiencies that need to be addressed.
Example of Material Variance
Let’s assume we are running a furniture manufacturing company and the primary raw material we use is wood. We have set a standard that we should be able to manufacture a table using $100 worth of wood (this is our standard cost). In a particular month, we manufactured 100 tables.
So, based on our standards, the cost of wood for producing 100 tables should be $100 * 100 = $10,000. This is our standard cost for the materials.
Let’s break it down into two scenarios for material price variance and material usage variance:
Material Price Variance:
Let’s say due to a surge in market prices, the actual cost of wood we used was $120 per table. So, the actual cost for the 100 tables would be $120 * 100 = $12,000.
Our material price variance would then be: $12,000 (actual cost) – $10,000 (standard cost) = $2,000 unfavorable. This is unfavorable because our actual cost is higher than our standard cost.
Material Usage Variance:
Let’s now assume the price per table remained the same at $100, but due to a new manufacturing process, we were able to use less wood. We ended up using $90 worth of wood per table instead. So, the actual cost for the 100 tables would be $90 * 100 = $9,000.
Our material usage variance would then be: $9,000 (actual cost) – $10,000 (standard cost) = $1,000 favorable. This is favorable because our actual cost is lower than our standard cost due to efficient use of materials.
In reality, managers would usually look at these two variances together as material cost variance to get an overall picture of how material costs are being controlled in the production process.
