TYPESOF STANDARDS FOR VARIANCE ANALYSIS 1. MATERIAL VARIANCE-The cost of the material which are used ina manufactured product are determined by two basic factors: the price paid forthe materials, and the quantity of materials used in production, this gives riseto the possibility that the actual cost will differ from the standard cost becausethe actual quantity of materials used will be different from the standardquantity and/or that the actual price paid will be different from the standardprice. We can therefore calculate a material usage and a material pricevariance.
Materialprice variance :-The starting point for calculatingthis variance is simply to compare the standard price per unit of materialswith the actual price per unit. The material price variance isequal to the difference between the standard price(SP) and the actual price (AP)per unit of materials multiplied by the quantity of materials purchased (QP): (SP-AP) x QPPOSSIBLE CAUSESIt is incorrect to assume thatthe material price variance will always indicate the efficiency of thepurchasing department. actual prices may exceed standard prices because of achange in market conditions that causesa general price increase for the type of materials used. The price variancemight therefore be beyond the control of the purchasing department.
Alternatively,an adverse price variance may reflect a failure by the purchasing department toseek the most advantageous sources of supply. a favourable price variance mightbe due to the purchase of inferior quality materials, which may lead to inferiorproduct quality or more wastage. For example: the price variance for material B is favourable, but we shall see in thenext section that this is offset by excess usage. If the reason for this excessusage is the purchase of inferior qualitymaterials then the material usage variance should be charged to the purchasing department.