Material Cost Variance

Material Cost Variance

Material Cost Variance (MCV) is the difference between the standard cost of the material allowed (standard material) for the output to be achieved and the actual cost of the material used. ICMS has defined MCV as the difference between the standard direct material cost of actual production volume and the actual cost of direct material.

It is the aggregate of material price and usage variance. The main reasons of MCV are, cost of actual rate per unit is different than standard rate per unit or actual quantity used for actual production is different than standard units for actual production.

Formula

The formula to compute Material Cost Variance is as follows:

Material Cost Variance (MCV) = Standard Cost of the Material for Actual Output – Actual Cost of the Material Used

OR

MCV = Material Price Variance + Material Usage or Quantity Variance

OR

MCV = Material Price Variance + Material Mix Variance + Material Yield Variance

In order to compute the MCV, it is required to know:

a. Standard quantity of the materials that should have been required to produce the actual output. Hence, the standard quantity of materials is = Actual Output x Standard Quantity of the Materials Per Unit

b. Standard Price Per Unit of Materials

c. Actual Quantity of Materials Used

d. Actual Price Per Unit of Materials

Generally the purchase manager is held responsible for the material cost variance but it is fine as long as the variance arises due to material usage variance. It is directly attributable wrong planning and estimation by the manager. However, we cannot held him responsible for the variance arising due to increase in the market price of the materials. It is beyond his control. What the manager can could in case of increase in prices from the previous supplier, he can find out for any alternative supplier who can deliver same quality of material at lesser prices. However, it is not very certain that supplies will be managed at lesser price everytime.

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