How do I calculate material cost variance, material price variance and material usage variance?

Question

Standard costing in CMA Inter Management Accounting confuses me. I always get the favourable and adverse signs wrong, and I'm not sure whether to use standard quantity for actual output or the budgeted quantity. Can someone explain with one example?

GradeHunt_Team · Answer

Formulas:
Material Cost Variance (MCV) = (SQ x SP) - (AQ x AP)
Material Price Variance (MPV) = (SP - AP) x AQ
Material Usage Variance (MUV) = (SQ - AQ) x SP
MCV = MPV + MUV

SQ = standard quantity for the ACTUAL output, not the budgeted quantity. This is the most common mistake. SP = standard price, AQ = actual quantity used, AP = actual price.

Sign rule: with standard written first in each formula, a positive answer is Favourable (F) and a negative answer is Adverse (A).

Worked example:
Standard: 2 kg per unit at Rs 50 per kg
Actual output: 1,000 units
Actual material used: 2,100 kg at Rs 48 per kg

SQ = 1,000 x 2 = 2,000 kg
SQ x SP = 2,000 x 50 = Rs 1,00,000
AQ x AP = 2,100 x 48 = Rs 1,00,800

MCV = 1,00,000 - 1,00,800 = -800, so Rs 800 (A)
MPV = (50 - 48) x 2,100 = Rs 4,200 (F)
MUV = (2,000 - 2,100) x 50 = -5,000, so Rs 5,000 (A)
Check: 4,200 (F) - 5,000 (A) = 800 (A). It matches.

Reading the result: the buyer saved Rs 2 per kg, but production used 100 kg more than the standard. One possible story is cheaper, lower-quality material causing more wastage. So the two variances may be linked, and responsibility for them is not always separate (price usually sits with purchase, usage with production).

If the quantity purchased differs from the quantity used, the price variance can be computed on the quantity purchased, at the time of purchase. Follow what the question asks.

Next step: the usage variance can be split further into mix and yield variances when more than one material is used.

How do I calculate material cost variance, material price variance and material usage variance?

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