Lessons · Accounting · material price and quantity variances
Material: was it the price, or the amount
A total difference from standard splits into two. The price variance is the difference in price per unit of material times the quantity actually bought. The quantity variance is the difference between the quantity used and the quantity that should have been used, valued at the standard price.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
The split is the whole point, because the two have different causes and usually different owners. A buyer who found cheaper material and a workshop that wasted more of it can cancel out to almost nothing in total, and reporting the total alone hides both.
How to think about it
Write the standard for the output actually achieved. Price variance: (actual price minus standard price) times actual quantity. Quantity variance: (actual quantity minus standard quantity for actual output) times standard price. Label each favourable or adverse and say what it means.
Worked example
Standard: 3 kg a unit at 4.00. Made 2,000 units, so 6,000 kg allowedThe standard is re-based on what was actually produced.
Actually used 6,300 kg, paid 3.90 a kgWhat happened.
Price = (3.90 − 4.00) × 6,300 = −630, favourableBought below standard price.
Quantity = (6,300 − 6,000) × 4.00 = 1,200, adverseUsed 300 kg more than the output allowed. Net adverse 570, and the two numbers say more than the one.
Your turn
Made 2,000 units at a standard of 3 kg each. Write the line that gives the quantity allowed.
Standard quantity = 2,000 × = 6,000 kg
Solve one, graded on the server
The trap
Comparing actual usage against the ORIGINAL budget rather than against the standard for what was actually made. A factory that made more units than planned will use more material for entirely good reasons, and against the original budget that reads as waste.