Sales, material, and labour variances - Material price and u...

Learning Outcomes

After reading this article, you will be able to explain the purpose of material cost variances in standard costing systems, calculate material price and usage variances, and interpret their significance for management control. You will know how to identify the causes of adverse or favourable variances and recommend appropriate actions. This will help you answer exam questions requiring accurate variance analysis and explanations for deviations in material costs.

ACCA Management Accounting (MA) Syllabus

For ACCA Management Accounting (MA), you are required to understand how standard costing supports control by highlighting variances between expected and actual material costs. This article supports your revision by addressing the following key syllabus areas:

• Calculate material total, price and usage variances for actual versus standard material costs.
• Explain the reasons for material variances and possible management responses.
• Interpret the significance of favourable or adverse variances in a business context.
• Distinguish between types of cost variances in standard costing systems.
• Recommend control actions to address significant deviations in material costs.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Define the material price variance and material usage variance in your own words.
2. If a company uses 5,600 kg of material to produce 1,000 units, when the standard quantity allowed is 5 kg per unit, what is the material usage variance if the standard price is $4 per kg?
3. True or False: The material price variance is always calculated using the quantity of materials actually used in production.
4. List two possible reasons for an adverse material price variance and two for a favourable material usage variance.

Introduction

Material cost variances help management assess performance by measuring the difference between what materials should have cost (standard) and what they did cost (actual). This analysis is split into two main types: material price variance (effect of buying at different prices) and material usage variance (effect of using more or less material than expected). By identifying these differences, managers can investigate inefficiencies, take corrective actions, and improve cost control.

Key Term: material price variance
The difference between the actual cost of materials purchased and the cost expected at standard price for the actual quantity purchased.

Key Term: material usage variance
The difference between the actual quantity of material used and the standard quantity allowed for actual output, valued at the standard price.

Material Cost Variance Overview

Under standard costing, material cost variances are divided:

• Total Material Cost Variance: The combined impact of paying a different price and using a different quantity than expected.
• Material Price Variance: The result of paying more or less per unit of material than the standard price.
• Material Usage Variance: The result of using more or less material in production than the standard quantity allowed for actual output.

The calculation structure for variances is as follows:

• Material Price Variance: Step 1 – Step 2
• Material Usage Variance: Step 2 – Step 3
• Total Material Cost Variance: Step 1 – Step 3 (sum of above)

Worked Example 1.1

A clothing manufacturer budgeted for 2 kg of material per shirt at $5 per kg. In a period, 550 shirts were made. The company bought and used 1,150 kg of material at a cost of $6,325.

Required: Calculate the (a) material price variance, (b) material usage variance, and (c) total material cost variance.

Answer:
Standard quantity for actual output: 550 shirts × 2 kg = 1,100 kg
Standard cost (1,100 kg × $5) = $5,500
Actual quantity × Actual price: 1,150 kg × $5 = $5,750
Actual quantity × Standard price: 1,150 kg × $5 = $5,750
Actual cost: 1,150 kg × $5.50 = $6,325
(a) Material price variance = (Actual quantity × Actual price) − (Actual quantity × Standard price)
= ($6,325) – ($5,750) = $575 Adverse
(b) Material usage variance = (Actual quantity × Standard price) − (Standard quantity × Standard price)
= ($5,750) – ($5,500) = $250 Adverse
(c) Total material cost variance = $6,325 – $5,500 = $825 Adverse

Material Price Variance

The material price variance isolates the effect of paying a price different from standard.

Material Price Variance Formula:

$\text{Material price variance} = (\text{Actual price} - \text{Standard price}) \times \text{Actual quantity purchased}$

• Favourable if actual price is lower than standard.
• Adverse if actual price is higher than standard.

Key Point: The variance is based on the total quantity purchased (not just used), so leftover inventory is included.

Worked Example 1.2

A company buys 2,000 kg of plastic at $2.60 per kg, but the standard price is $2.50 per kg. What is the price variance?

Answer:
($2.60 – $2.50) × 2,000 kg = $0.10 × 2,000 = $200 Adverse

Exam Warning

When calculating the price variance, always use the entire quantity purchased—even if some is still in inventory. Using only quantity used is a common mistake.

Material Usage Variance

The usage variance measures the effect of using a quantity different from standard for the actual level of output.

Material Usage Variance Formula:

$\text{Material usage variance} = (\text{Actual quantity used} - \text{Standard quantity allowed}) \times \text{Standard price}$

• Favourable if less material is used than standard allows.
• Adverse if more material is used.

Key Point: The variance is always valued at the standard price, not the actual price.

Worked Example 1.3

A bakery produces 800 loaves. Standard material per loaf is 0.5 kg of flour. In total, 430 kg are used. Standard flour price is $1.20 per kg.

Required: What is the material usage variance?

Answer:
Standard quantity: 800 × 0.5 kg = 400 kg
Actual quantity: 430 kg
Usage variance: (430 – 400) × $1.20 = 30 × $1.20 = $36 Adverse

Total Material Cost Variance

The total variance summarizes the combined effect of buying at different prices and using different quantities.

$\text{Total material cost variance} = (\text{Actual cost}) – (\text{Standard cost allowed for actual output})$

Alternatively, it is the sum of the price and usage variances.

Causes of Material Price and Usage Variances

Understanding reasons for variances enables management to take corrective action.

Common causes of material price variance

• Market price fluctuations
• Bulk discounts missed or gained
• Use of substitute materials
• Unexpected transport or freight costs
• Exchange rate movement (on imported materials)
• Ineffective purchasing negotiation

Common causes of material usage variance

• Poor material quality (may increase waste)
• Use of substitutes (may require more/less material)
• Inefficient production methods
• Unskilled or new workforce
• Poor maintenance of equipment (causing waste)
• Pilferage or recording errors

Revision Tip

A price variance may be linked to a usage variance. Using lower-quality material may save on price but increase wastage.

Reporting and Investigating Variances

Management should focus on significant or persistent variances. Minor one-off differences may not warrant action. Always consider whether a variance is controllable and investigate in proportion to its value and any impact on operations.

Example of Inventory Impact on Variances

If not all material purchased is used, inventory remains at standard cost. Therefore:

• Price variance: always calculated on total quantity purchased.
• Usage variance: calculated on the quantity actually used.

Worked Example 1.4

A factory bought 1,200 kg of steel, used 1,000 kg in production, and the rest remains in inventory. The standard price is $3/kg; actual price is $2.80/kg.

Calculate:
(a) Material price variance
(b) Material usage variance

Answer:
(a) Price variance: (Actual price – Standard price) × Quantity purchased
= ($2.80 – $3.00) × 1,200 kg = –$0.20 × 1,200 = $240 Favourable
(b) Usage variance: (Actual quantity used – Standard quantity allowed) × Standard price
If output standard allows for 990 kg, usage variance = (1,000 – 990) × $3 = $30 Adverse

Summary

Material price and usage variances are central to management control under standard costing. The price variance measures the impact of paying a different amount than planned for materials. The usage variance assesses efficiency in material consumption. Understanding, calculating, and interpreting these variances allows businesses to control costs, identify inefficiencies, and take targeted corrective actions.

Key Point Checklist

This article has covered the following key knowledge points:

• The difference between material price variance and material usage variance
• Formulas and calculation steps for each variance
• Root causes of adverse or favourable variances
• The importance of using correct quantities (purchased vs. used) in calculations
• The significance of investigating material variances for cost control

Key Terms and Concepts

• material price variance
• material usage variance