Reasons of Favorable Material Usage Variance

Reasons of Favorable Material Usage Variance

Favorable material usage variance would be achieved, when the actual material used in the production is lower than standard usage. This can be achieved by introducing and implementing following measures

1.    High Quality Material

Use of high quality material would lower the material wastage, and this would result in favorable material usage variance.

2.    High Skilled Labour

Use of high skilled labour would also achieved favorable material usage variance, because material would be handled more carefully by the skilled people.

3.    Training of Labour

Material handling training of labour would also improve material handling, thus such training would helps in achieving favorable material usage variance.

4.    Advance Technology

Use of advance machinery & technology would help in improving material handling and reducing the material wastage. Thus a favorable material usage variance can be achieved.

Material Usage Variance Formula

Material Usage Variance Formula

Material usage variance is difference between standard quantity and actual quantity and such difference is measured at standard cost. Material usage variance may be favorable or adverse.

Material usage Variance = Standard Price x (Standard Quantity- Actual Quantity).

Example

Actual Quantity Consumed = 5000 kg

Per unit Standard Price of material A = $ 8

Units produced=1000

Standard usage per unit = 6 kg

Price of Material = 40,000

Calculate Material Price Variance

Solution

Standard consumption = Units produced x standard usage

=1000 x 6

=6,000 kg

$ 8 x (6000-5000)

= $ 8 x 1000

= $8000 (material usage variance)

Reasons for Adverse Material Price Variance

Reasons for Adverse Material Price Variance

Adverse material price variance would result when actual prices are more than standard prices, Therefore reasons of raise in price are reasons of adverse material price variance. Those reasons include poor negotiation with supplier, inflation, and discount withdrawal by the supplier, shortage in market, and increase in demand of material.

1.    Inflation in the Economy

In case of inflation (situation of rising prices) material price variance would be unfavorable or adverse, because material prices would have rising tendency i.e. actual expenditure would be more than expected expenditure.

2.    Discount withdrawal

Discount withdrawal by the supplier would also result in unfavorable material price variance because cost would rise, and actual expenditure on material would be higher than expected expenditure.

3.    Shortage of Material

Shortages in material supply would also raise the prices, which would ultimately impact the material price variance adversely.

4.    More Demand

Raise in demand of material would also push the prices upward and such upward trend may result in adverse material price variance.

Material Price Variance Formula

Material Price Variance Formula

Material Price variance is difference between standard price and actual price of actual quantity consumed during the production. Material price variance may be favorable or adverse.

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Example

Actual Quantity Consumed = 5000 kg

Standard Price per unit = $ 5

Price of Material = 40,000

Calculate Material Price Variance

Solution

Actual Price = 40000/5 = 8 

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Material Price Variance = 5000 (5 – 8)

=5000 (-3)

=-15,000 (Adverse Material Price Variance)

Reasons of Favorable Material Price Variance

Reasons of Favorable Material Price Variance

Reasons for favorable material price variance include deflation in the economy, price negotiation with the supplier, high discount on bulk purchases etc. whenever actual price fall below the standard price, the favorable price variance would be achieved.

1.    Deflation in the Economy

In case of deflation in the economy the material prices would fall and thus favorable price variance may be achieved by the company i.e. actual cost of material used may be lower than standard cost.

2.    Bulk Purchases Discount

In case of discount on bulk purchases, a favorable material price variance would be achieved by the company, because such price may lower the actual price below the standard price.

3.    Cost Reducing Negotiation

Effective cost reducing negotiation or reviewing the supply chain for cost reduction would also result in favorable material price variance. (Actual cost is lower than standard cost).

4.    Fall in Material Demand

Fall in material demand may also lower the prices of material and such situation may result in favorable material price variance.

5.    Excess Supply of Material

Excess supply of material may also push the price downward, which may produce favorable material price variance for the company.