Quantity Variance
Quantity variance, often referred to as “usage” or “efficiency” variance, is a concept used in managerial and cost accounting. It measures the difference between the actual quantity of materials used in production and the standard quantity that should have been used, given the actual level of production, all multiplied by the standard cost per unit of the input.
In simple terms, it evaluates how efficiently materials or labor were used in the production process compared to what was expected or budgeted for.
The formula for calculating the materials quantity variance is:
Materials Quantity Variance (MQV) = (Actual Quantity – Standard Quantity) x Standard Cost
Where:
- Actual Quantity is the actual amount of materials used in production.
- Standard Quantity is the expected amount of materials that should have been used for the actual production level.
- Standard Cost is the budgeted cost of one unit of material.
The variance can be favorable or unfavorable:
- Favorable Quantity Variance: Occurs when the actual quantity used is less than the standard quantity expected for the actual level of production.
- Unfavorable Quantity Variance: Occurs when the actual quantity used exceeds the standard quantity expected for the actual level of production.
It’s important to note that quantity variance can also apply to labor (often called labor efficiency variance), where it measures the efficiency of labor hours utilized compared to the standard.
Example of Quantity Variance
Let’s delve into a fictional example involving a bakery to illustrate the concept of quantity variance more tangibly.
“Baker’s Delight” produces loaves of bread. The standard quantity of flour needed for every loaf of bread is 0.5kg, and the standard cost of flour is $2 per kg.
In a particular week, “Baker’s Delight” aims to produce 1,000 loaves of bread. Based on their standard, they should have used 500kg of flour (0.5kg x 1,000 loaves).
However, at the end of the week, they find that they’ve actually used 530kg of flour to produce the 1,000 loaves.
To calculate the Materials Quantity Variance:
Materials Quantity Variance (MQV) = (Actual Quantity – Standard Quantity) x Standard Cost
- Actual Quantity: 530kg (what was actually used)
- Standard Quantity for 1,000 loaves: 500kg (0.5kg x 1,000 loaves)
- Standard Cost: $2 per kg
Plugging in the numbers:
MQV = (530kg – 500kg) x $2
MQV = 30kg x $2
MQV = $60 Unfavorable
The unfavorable variance of $60 indicates that “Baker’s Delight” used flour worth an extra $60 than what was standard for producing the 1,000 loaves.
Given this result, the bakery’s management might look into reasons for the variance. Perhaps there was some wastage, or maybe the flour was not properly measured during production, or possibly a change in the recipe led to using more flour than planned. Whatever the reason, identifying and understanding variances can help businesses improve their operations and cost efficiency.
This example showcases how quantity variance provides valuable insights into production efficiency, helping businesses monitor and control their costs.
