Standard Costing: Material variances (Price, Usage, Mix & Yield)

By Jackie, Researcher

Topic: Education

Area of discussion: Cost & Management Accounting

Chapter: Standard Costing – Material variances (Price, Usage, Mix & Yield)

The objectives of this posting are to guide students in the computation of all material variances, to share a random picked ACCA Paper 8 Managerial Finance’s question with clear step-by-step workings and explanation, and finally show you how to double check your answers. Ideally, professional exams like ACCA and LCCI require students to compute advanced variances (i.e. direct materials mix and yield variances). Normally, students will not face any problems in handling direct materials price and usage variances, but struggling in solving those advanced variances (students often confuse when normal loss exists). Hopefully, this sharing will help students to understand this topic clearer and better.

The breakdown of the materials variances

Formulas and descriptions:

Total direct materials variance

The total direct materials variance is the difference between the standard materials cost for the actual production and the actual materials cost. Alternatively, it can also be computed by summing up direct materials price variance and direct materials usage variance.

Total direct materials variance = standard materials cost – actual materials cost

Total direct materials variance = direct materials price variance + direct materials usage variance

Material price variance

The material price variance is equal to the difference between the standard price and the actual price per unit of materials multiplied by the quantity of material purchased:

Material price variance = (standard price per unit of material – actual price) x quantity of material purchased

Material usage variance

The material usage variance is equal to the difference between the standard quantity required for actual production and the actual quantity used multiplied by the standard material price:

Material usage variance = (standard quantity of materials for actual production – actual quantity used) x standard price per unit

Materials mix variance

The materials mix variance arises when the mix of materials used differs from the predetermined mix included in the calculation of the standard cost of an operation. If the mixture is varied so that a larger than standard proportion of more expensive materials is used, there will be an unfavourable variance. When a larger proportion of cheaper materials are included in the mixture, there will be a favourable variance.

Materials mix variance = (actual quantity in standard mix proportions – actual quantity used) x standard price

Materials yield variance

The materials yield variance arises because there is a difference between the standard output for a given level of inputs and the actual output attained.

Materials yield variance = (actual yield – standard yield from actual input of material) x standard cost per unit of output 

Answers and comments:

Additional readings, related links and references:

This link provides an extremely good and detailed step-by-step calculation and there are a lot of worked examples. Full formulas are provided and alternative methods for computation are shown clearly.

http://www.futureaccountant.com/standard-costing-variance-analysis/study-notes/material-cost-variance.php

Materials mix and yield: Relevant to ACCA qualification paper F5. An extremely good discussion on variance analysis with excellent illustration, worked examples and clear explanation.

http://www.chinaacc.com/upload/html/2012/12/4/liuxim1542020121204164534135519.pdf

Standard Costing 2 Material Variances: “Managerial Accounting SFCC Fall 2007 Chapter 9 Videos”

http://www.youtube.com/watch?v=EnKCt68FvQI

This link provides a number of standard costing examples. There are a total of 6 parts in it. Good site to look at in order to master variance analysis.

http://www.accountingcoach.com/online-accounting-course/30Xpg02.html

Material mix and yield variances: Grahame Steven explains why understanding material mix and yield variance is a recipe for success.

http://www.cimaglobal.com/Documents/ImportedDocuments/ci_apr_01_p26-27.pdf