Material cost, price and usage variances
Compute the three material variances and prove that the price and usage variances reconcile to the total cost variance.
Marks
5 marks
Exam time
9 min
Difficulty
Moderate
The question
The standard material cost for the output actually achieved is 500 kg at ₹20 per kg. The company actually consumed 520 kg at ₹19 per kg. Compute the material cost variance, the material price variance and the material usage variance, and show that the last two reconcile to the first.
- Given
- Standard quantity for actual output (SQ) = 500 kgStandard price (SP) = ₹20 per kgActual quantity (AQ) = 520 kgActual price (AP) = ₹19 per kg
Formulas used
- Material cost variance = (SQ × SP) − (AQ × AP)
- Material price variance = (SP − AP) × AQ
- Material usage variance = (SQ − AQ) × SP
- MCV = MPV + MUV
Step-by-step working
01Lay out the standard and actual cost
1Standard cost = 500 kg × ₹20 = ₹10,000 Actual cost = 520 kg × ₹19 = ₹9,880
Note that the standard quantity is for the output actually achieved, not for budgeted output. Getting this wrong invalidates every variance below it.
02Material cost variance
1MCV = ₹10,000 − ₹9,880 = ₹120 (F)Standard minus actual. A positive result is favourable because the company spent less than standard.
03Material price variance
1.5MPV = (SP − AP) × AQ = (₹20 − ₹19) × 520 kg = ₹1 × 520 = ₹520 (F)Price variance is always weighted by ACTUAL quantity — this is the single most common error in the chapter. You only discover the price difference on the units you actually bought.
04Material usage variance
1.5MUV = (SQ − AQ) × SP = (500 − 520) × ₹20 = (−20) × ₹20 = ₹400 (A)Usage variance is always weighted by STANDARD price, so that a price movement does not contaminate a measure of physical efficiency.
05Reconcile
—MPV + MUV = ₹520 (F) + ₹400 (A) = ₹120 (F) = MCV ✓Always close with the reconciliation. If it does not tie, you have swapped a standard price for an actual price somewhere — check the weighting first.
MCV · MPV · MUV
₹120 (F) · ₹520 (F) · ₹400 (A)
Where marks are lost
- Weighting the price variance by standard quantity instead of actual quantity — the defining error of this chapter.
- Weighting the usage variance by actual price, which mixes a price effect into an efficiency measure.
- Omitting the (F) or (A) label. A variance without a direction is not an answer and is routinely marked down.
- Using budgeted output rather than the standard quantity for actual output.
In the exam
Variance analysis rewards a fixed layout. Write SQ, SP, AQ, AP in a small table before you compute anything; nearly every mark lost in this chapter traces back to picking up the wrong one of those four numbers.
Practise next
Have questions?
Find answers.
Still unsure about something? We're happy to help you figure it out.
Talk to usHow do I remember which variance uses which weighting?
The variance you are measuring tells you what to hold constant. A price variance measures price, so quantity must be actual. A usage variance measures quantity, so price must be standard. Hold constant the thing you are not measuring.
Can both variances be favourable?
Yes, and both can be adverse. Here the price variance is favourable and the usage variance adverse — a classic pattern where cheaper material was bought and more of it was consumed, which is a genuine operational finding worth stating in a one-line comment.
Reading a solution is not practice. Writing one is.
Generate fresh numericals on this exact chapter, attempt them under time, and have your written working evaluated step by step.
Start practising free- Free to start
- Step-wise marking
- All 3 CA levels