Material Standards

STANDARD COSTING
& VARIANCE ANALYSIS
Materials
Standards
GROUP 1
Represent benchmarks,
expectations or norms
that will be used as a tool
for the objective of
evaluation of performance Standards
May be quantitative or
qualitative
Not just by profit-
oriented companies
When budget is broken
down on a unit basis
Budgeted costs on a unit
Standards
basis
Fixed/Basic Standard
A gauge against which

both expected and
Types of actual performance are
Standards evaluated
Represents standards
that are left unchanged
over long periods
Ideal/Theoretical/Tight
Standards
A standard of perfection
Types of Represents conditions
Standards that are seldom
unattainable
Ignore factors that
effect increases in cost
Currently Attainable/
Normal/Practical
Standards
Types of Based on a high degree
Standards of efficiency, tight
standards but are
attainable
Currently Attainable/
Normal/Practical
Standards
Easier to achieve than
Types of ideal standards because
Standards allowances are made for
normal spoilage,
machine breakdowns and
lost time
Materials Standards
Identify and list the specific
direct material components
used to manufacture the
product.
What types of inputs are
used?
What quantity of inputs are
used?
What quality of inputs are
used?
How to establish the
Standard Price for
Materials
Standard cost for Direct

Materials used is computed by
examining current purchase
price and adjusting them for
expected changes and
estimating of the direct
material (DM) is required.
Standard Price for
Materials
Standard price for Materials

can be established from the
information available in the
purchasing department.
Standard Price for
Materials
Operation managers and

industrial engineers help
determine the quantities of
materials needed to make the
product.
Quality Decisions
Before making quality decisions, managers

should seek the advice of materials experts,
engineers, cost accountants, marketing
personnel, and suppliers.
Quality Decisions
Quantity and Cost estimates become direct

functions of quality decisions. Then the bill
of materials should be developed.
Bill of Materials
A bill of materials (BOM) is an extensive list of
raw materials, components, and assemblies
required to construct, manufacture or repair a
product or service. A bill of materials usually
appears in a hierarchical format, with the highest
level displaying the finished product and the
bottom level showing individual components and
materials. (Mitchell Grant, 2019)
Standard Price per Unit
The standard price per unit for direct

materials should reflect the final
delivered cost of the materials, net of
any discounts taken
Standard Price per Unit
Standard quantity per unit should reflect

the amount of materials required for each
unit of finished product, as well as an
allowance for unavoidable waste,
spoilage, and other normal
inefficiencies.
Variance Analysis
It is considered an
effective control and
evaluation tool
Variance Analysis
It is a process of
categorizing the nature
of the differences
between standard and
actual costs
determining the reason
for those differences.
Variance Analysis
If standards are loose,

variances are generally
favorable.
If standards are strict,

variances are generally
unfavorable.
Variance Analysis
Only costs causing

large variances are
worthy of
investigation.
Variances
Favorable:
Actual cost is less than
standard cost
Unfavorable:
Actual cost is greater
than standard cost
Variances
Usage Variance:
Difference between the
quantity of actual inputs,
and the quantity of standard
inputs allowed for the actual
output of the period
Variances
Variance Analysis:
Process of computing and
interpreting variances
General Model for Variance Analysis
ACTUAL COST STANDARD COST
Actual Price Standard Price Standard Price
x x x
Actual Quantity Actual Quantity Standard Quantity
Price/Rate Usage/Quantity
Variance Variance
Total Variance
Direct Costs Variances
Material Variances
Material cost is affected by two

factors:
quantity and price
Material Variances
Price and quantity variances are

considered separately because
different managers are usually
responsible for buying and for
using inputs and the buying and
using activities occur at
different points in time.
Material Price
Variance (MPV)
Measures the difference between

the actual cost of material and
the standard cost expected to be
paid for the material.
Material Price
Variance (MPV)
Possible causes of MPV:
Fluctuation in market price of
materials
Failure to take purchase
discounts
Material Price
Variance (MPV)
Possible causes of MPV:
Transportation cost higher than
expected
Different grade of DM purchased;
and favorable or unfavorable
purchase contract items
Material Quantity
Variance (MQV)
Difference between the actual
amount of materials used in the
production process and the
amount that was expected to be
used.
Material Quantity
Variance (MQV)
Possible causes of MQV:

Defects in direct materials
Inexperienced workers
Poor supervision
Material Quantity
Variance (MQV)
Possible causes of MQV:

Lack of proper tools or machines
Good or poor control over waste
or spoilage
Different Methods in
Computing Material Variances
Illustration: Assume that DC Manufacturing Company, a company
engaged in the production of gigantic candles, has produced 2, 100
units for the month of June and has the following additional
information: Standard: Material 2 pounds per unit @ 5.80 pound,
Actual: Material 4,250 pounds purchased and used @ 5.65 per pound.
Method 1: Formula Based

MPV (AP-SP)*AQ = Pxxx Favorable/Unfavorable
MQV (AQ-SQ)*SP = xxx Favorable/Unfavorable
Material Cost Variance= Pxxx Favorable/Unfavorable
MPV (P5.65-5.80)*4,250 lbs = -P 637.50 F

MQV [4,250-(2 lbs/unit*2,100 units)]*P5.80/unit= 290.00 U
Total Material Variance = -P 347.50 F
Method 2: Cost Line Method
AP x AQ SP x AQ SP x SQ
MPV MQV
Total Material Variance
P5.65*4,250 P5.80*4,250 P5.80*(2,100*2lbs)
= P 24,012.50 = P 24,650 = P 24,360
P 637.50 F (MPV) P 290.00 U (MQV)
P 347.50 (Total Material Variance)

Method 3: Three Way Analysis

MPV (AP-SP)*SQ = Pxxx Favorable/Unfavorable
MQV (AQ-SQ)*SP = xxx Favorable/Unfavorable
MPQV (AP-SP)*(AQ-SQ) = xxx Favorable/Unfavorable
Material Cost Variance= Pxxx Favorable/Unfavorable
MPV (P5.65-P5.80)*(2,100*2) = -P 630.00 F
MQV [4,250-(2,100*2)]*P5.80 = 290.00 U
MPQV (P5.65-P5.80)*[4,250-(2,100*2)] = (7.50) F
Material Cost Variance = P 347.50 F
Point of
Purchase Model
Point of Purchase Model
Total Material Variance is the
sum of the price and quantity
variance
When the quantity of materials

purchased and used are
different, there will be a
change in computation
MATERIAL PURCHASE
PRICE VARIANCE
It is computed based on
Types of Material the quantity of materials
Price Variance purchased during the
period
It is also referred to as
the point of purchase
material variance model
MATERIAL PRICE
USAGE VARIANCE
It is the material price

Types of Material variance when computed
Price Variance based on the quantity of
materials used during the
period
Method 2: Cost Line Method
Modified formula for the computation of the
material variances when quantity purchased
and used are not the same:
AP x AQu SP x AQu SP x SQ
Material
Material Price
Quantity
Usage Variance
Variance
Total Material Variance
AP x AQp SP x AQp SP x SQu
Material Purchase Material Inventory

Price Variance Variance

Material Standards

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STANDARD COSTING

& VARIANCE ANALYSIS

A gauge against which

Standard cost for Direct

Standard price for Materials

Operation managers and

Before making quality decisions, managers

Quantity and Cost estimates become direct

The standard price per unit for direct

Standard quantity per unit should reflect

If standards are loose,

If standards are strict,

Only costs causing

Material cost is affected by two

Price and quantity variances are

Measures the difference between

Possible causes of MQV:

Possible causes of MQV:

Method 1: Formula Based

MPV (P5.65-5.80)*4,250 lbs = -P 637.50 F

P 637.50 F (MPV) P 290.00 U (MQV)

P 347.50 (Total Material Variance)

Method 3: Three Way Analysis

When the quantity of materials

It is the material price

Material Purchase Material Inventory

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