Lisa Borga

In order to understand Material Price Variance, we must first understand Material Cost Variance.

Material cost variance is a key component to calculating the material price variance.

## Material Cost Variance

The Material Cost Variance (MCV) compares the standard cost that a business pays for the direct materials it consumes as part of its production to the business’s actual cost of those direct materials.

The Material Cost Variance allows companies to see whether the cost that they have incurred for direct materials is more or less than the standard cost of those direct materials.

Therefore, Material Cost Variance is a good way for a business to keep an eye on how much the company is deviating from the standards the business has set.

### Formula for MCV

Material Cost Variance = Standard Cost for Actual Output – Actual Cost

### Reasons For Material Cost Variance

Material cost variances may be caused by the purchase price a business is paying being less than the standard price or due to a business changing the quantity of the material they use.

Therefore, Material Cost Variance is made up of two different components basically: Material Quantity Variance and Material Price Variance.

Next, we will look at Material Price Variance.

## Material Price Variance

A Material Price Variance (MPV) occurs when the actual price paid for materials used in production is different than the standard price for the materials.

The Material Price Variance will be favorable if the actual price paid for the materials is less than the standard price.

In contrast, if the price paid for the materials is greater than the standard price, the Material Price Variance will be adverse.

A Material Price Variance may occur for a variety of reasons, such as a rise in price, changes in transportation expenses, size of the order, or the quality of materials being purchased, among others.

### MPV Formula

The Formula used to compute Material Price Variance is:

Material Price Variance = AQ (SP — AP)

Where,

AQ = Actual Quantity

SP = Standard Price

AP = Actual Price

An example might be helpful in understanding the formula.

 Standard Actual Price \$7.00 per lb. \$5.00 per lb. Quantity 75 lbs 50 lbs

The Material Price Variance is computed as shown below.

MPV = (\$7-\$5) x 50 lbs. = \$100 (F)

The (F) means that there is a favorable variance. It’s favorable since the actual price paid for the material was lower than the standard price.

Had the actual price for the material been greater than the standard price, it would have resulted in an (A), meaning an adverse variance.

Next, we will explain what Material Quantity Variance is and how to compute it.

## Material Quantity Variance

A Material Quantity Variance, also known as Material Usage Variance, occurs when a company uses a different amount of material for production than the standard quantity that should have been used for production.

The Material Quantity Variance will be favorable if the actual quantity used is less than the standard quantity.

In contrast, the Material Quantity Variance will be adverse if the actual quantity used is more than the standard quantity.

There are a number of reasons that a company may have a Material Quantity Variance.

It could be due to theft, waste, or differences in material quality, among others.

### Formula for Material Quantity Variance

The formula for Material Quantity Variance is:

(SQ – AQ) x SP = Material Quantity Variance

Now, let’s do an example to show how to compute Material Quantity Variance.

MUV = (75lbs. – 50 lbs.) x \$7 = \$175 (F)

The Material Quantity Variance in this example is favorable because the standard quantity is greater than the actual quantity that the company used.

The result would have been adverse had the actual quantity used been greater than the standard quantity.

## Conclusion

Material Cost Variance is made up of the Material Quantity Variance and the Material Price Variance.

Therefore, Material Price Variance + Material Quantity Variance = Material Cost Variance.

We can check this by doing an example.

The formula for Material Cost Variance is:

Standard Cost – Actual Cost = MCV

This means that the (SQ x SP) – (AQ x AP) = (75 lbs. x \$7) – ( 50 lbs. x \$5) = \$525 – \$250 = \$275 (F)

The Material Cost Variance is favorable because the actual cost paid is less than the standard cost.

If the actual cost a business pays is more than the standard cost, the Material Cost Variance is adverse.

MCV = MPV + MQV

\$275 (F) = \$100 (F) + \$175 (F)

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1. Harper College "STANDARD COSTS AND VARIANCE ANALYSIS" Page 1 - 19. February 11, 2022

2. New Jersey Institute of Technology "Standard Cost Variance Calculations and Analysis" Page 1 . February 11, 2022

3. College of San Mateo "Standard Costs and the Balanced Scorecard" Page 1 . February 11, 2022