Variance in general is the difference between actual and the standard price or cost. Material variance or direct material variance is the difference between the real price of direct material and the cost of consumed or purchased a quantity of material, designated as standard. However, these standards and material price depend on current market price and possible changes that could happen in future.
Things might not go the same way as thought, and the real or actual price may vary from the set standard cost and businesses might have to pay either higher or lesser amount of money as the cost that was set initially as the standard. Material variances homework answers should consider these factors while working on the assignments.
The Formula for Material Variance:
Now, letâ€™s discuss the formula to calculate material variance:
Direct Material Price Variance = (Standard price if direct material per unit – The Actual price of direct material per unit) x Actual amount of direct material.
Material variances homework answers should use this formula for calculations.
Example calculation of Material Variance:
First Example: This can be used as a standard for material variances homework answers:
- Raw Material purchased by a glass company is as follows:
|Material||Quantity||Actual Price||Standard Price|
||50 tons||$ 50/ tom||$45/ton|
|Limestone||40 tons||$ 40/ton||$45/ton|
|Soda ash||30 tons||$30/ton||$32/ton|
- Now the first step is to calculate Actual Cost (Product of Actual quantity x Actual price)
Silica Sand: 50 tons x $ 50 = $2500
Limestone: 40 tons x $40 tons = $1600
Soda ash: 30 tons x $30 tons = $900
- The next step is to know the standard cost of actual quantity (Actual quantity x Standard Price)
Silica Sand: 50 tons x $ 45 = $2250
Limestone: 40 tons x $45 tons = $1800
Soda ash: 30 tons x $32 tons = $960
- The last step is to calculate the variance:
Hence, the material price variance = Actual Cost â€“ Standard Cost
Silica Sand: $2500 -Â $2250 = $250 (Adverse cost as actual cost is higher)
Limestone: $1600 – Â $1800 = $200 (Favorable cost as actual cost is lower)
Soda ash: Â Â Â $900 -Â $960 = $60 (Favorable cost as actual cost is lower)
- Now letâ€™s analyze this scenario:
Â A favorable variance means a cost-efficient acquisition. There could several reasons for this favorable variance, which are listed as follows:
- Reduction in the market price.
- Low-quality material purchased compared to the standard ones. This might be seen in adverse variance.
- Better price quotation by the acquisition or procurement department.
- Better procurement process used asthe comparison of prices from multiple sources before purchase.
- Discounts received on orders.
Opposed to this is the adverse price variance. Which means higher purchase price in comparison to the standard. There could be also several reasons for this adverse variance, which are listed as follows:
- Increase in the market price, as a whole.
2.Better quality materials bought compared to standard. This might be seen in favorable variance.
3.Better bargaining by suppliers
- Fewer discounts received in a purchase may be because of a lower amount of quality bought.
- Inefficient buying efficiency showed by procurement department.
Suppose a speaker manufacturing company is trying to but thin copper coil. About a meter of the coil is required for making one speaker. Hence, the standard cost of a speaker would be:
One meter of copper coil @ $1.5 is the direct material = (1 meter x $1.5 per meter = $1.5)
Overhead manufacturing cost: $ 0.6
During a certain month, this company bought about 1,000 meters of the copper coil. @$1.6 a meter and produced 500 speakers using 500 meters of the coil. Hence, the direct material variance for that month will be:
= (Actual amount purchased Ã— The actual rate) â€“Â (Actual amount purchased Ã— The standard rate)
= (1,000Ã—$1.60) â€“ (1,000Ã—$1.50)
= $1,600 â€“ $1,500
So, to summarize this company had an adverse material variance this month as the actual cost was more than standard.
Why is there a difference in variances?
In this case and in general the reasons for the variance being favorable or adverse could be as follows:
- If the size of the order of big then getting discounts is easier that might give favorable variance.
- Increase in market price is a major reason for unfavorable variances as this affects the whole system starting from purchase.
- Variance conditions also vary by the urgency of the matter. Like if some material is needed urgently as raw material then it generally comes along with associated costs.
- Also, a favorable variance might result from low-quality purchase as opposed to high quality.
- Transportation has always a big role, if this cos is increase dsignificantly, then adverse variance becomes inevitable.
- Another important reason is non-reliable vendors. Like, if raw material supplier canâ€™t meet the requirement, then the company must find another one.
Material variances homework answers should keep in mind all the components of material variance as discussed above. Especially, the case they are considering. The reason for favorable of adverse variances could be various, but it is important to analyze the reasons properly.
Material variances homework answers should also note that occurrence of variance is a normal scenario to happen. Sometimes it is significant, many times it is not. This should be rather used as a tool or method for cost controlling in the future.