Material Cost Variance(MCV)
Material cost variance is the deviation from the standard direct material cost, of the actual production volume and the actual cost of direct material. Material cost variance is also concerned as a sum of the direct material usage and price variances. The variances can be favorable or unfavorable. If the actual cost is lower than the standard cost, it is considered as favorable variance and if the actual cost exceeds the standard cost, the difference is unfavorable. There is not any rule of thumb for the calculation of direct material cost variances.
The following formula is used to calculate direct material cost variance:
MCV = (SQ x SP) - (AQ x AP)
Standard quantity (SQ) should be revised if standard outputs and actual outputs differ.
Revised standard quantity (RSQ) = (SQ/SO x AO)
Where,
SQ = Standard Quantity
SP = Standard Price
AQ = Actual Quantity
AP = Actual Price
SO = Standard Output
AO = Actual Output
Material cost variance represents the total of material price variance and material usage variances.
As such, MCV = Material price variance (MPV) + Material usage variance(MUV)
If the resulting figure is positive, the difference is denoted by favorable variance i.e.(F) and if the resulting figure is negative, the difference is denoted by unfavorable variance i.e.(U).
Calculation Of Material Cost Variance:
Illustration
- Standard quantity of material Q for 500 units of output is fixed as 800 kg.
- Standard price per kg. of material Q is estimated to be $ 5
- Actual quantity of material Q was 800 kg.
- Actual price of material was $ 4.5 per kg.
- Actual output was 400 units.
Solution,
Since the standard outputs and actual outputs differ, the standard quantity should be revised.
Revised standard quantity (RSQ) = (SQ/SO) x AO =800/500 x 400 = 640 units.
Now,
Material Cost Variance(MCV) = (SQ x SP)-(AQ x AP) = (640x5)-(800x4.5) = $ 400 (U)
Since, the resulting figure is negative the variance is denoted as unfavorable i.e. (U).
