Direct Material Cost Variance
It is otherwise called as Direct Material Variances. It is the difference between the standard cost of materials used for the actual output and the actual cost of materials used.
According to ICMA, London,
“It is the difference between the standard cost of direct materials specified for the output achieved and the actual cost of direct materials used”.
The direct material cost variances including material price variance, material usage variance, material mix variance and material yield variance. The following chart depicts the divisions of Direct Material Cost Variances very clearly.
Formula to calculate Direct Material Cost Variance
The following formula is used to calculate Direct Material Cost Variance.
- MCV = Material Cost Variance
- SQ = Standard Quantity for Actual Output
- SP = Standard Price
- AQ = Actual Quantity
- AP = Actual Price
The following formula is used for calculating SQ for actual output.
Standard Cost = SQ x SP
Actual Cost = AQ x AP
If the standard cost is more than the actual cost, the variance will be favorable and on the other hand if the standard cost is less than the actual cost the variance will be unfavorable or adverse.
1. Standard cost has to be calculated with reference to standard quantity for actual output. In such case, the information regarding standard output to be ignored.
2. If the problem is silent in respect of standard output and actual output, it will be assumed that standard output for which the standard was fixed has actually been achieved i.e. SO = AO
Causes for Direct Material Cost Variance
Direct material cost variance is caused due to the following reasons.
1. Change (increase / decrease) in the price of materials
2. Change (increase / decrease) in the quantity of materials used. This is happened due to
- Change in the mix of more than one type of materials in the process of manufacture.
- Change (increase / decrease) in the output.