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Causes of Material Price Variance

1. Causes of material price variance include recent changes in purchase prices, substituting different raw materials than specified, and not receiving anticipated cash discounts. 2. Changes in transportation and storage costs can also contribute to material price variances. 3. Reasons for direct cost variances include unreasonable cost standards, changes in prices or quantities, and accounting errors. Management should analyze variance reasons and take corrective actions like updating unreasonable standards.

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8K views1 page

Causes of Material Price Variance

1. Causes of material price variance include recent changes in purchase prices, substituting different raw materials than specified, and not receiving anticipated cash discounts. 2. Changes in transportation and storage costs can also contribute to material price variances. 3. Reasons for direct cost variances include unreasonable cost standards, changes in prices or quantities, and accounting errors. Management should analyze variance reasons and take corrective actions like updating unreasonable standards.

Uploaded by

shayne_wai
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Causes of material price variance:

1. There could have been recent changes in purchase price of materials.


2. Price variance can be due to substituting raw materials different from the original material specification.
3. Price variance can be attributed to the non availability of cash discounts which was originally anticipated at the
time of setting the price standards.
4. Changes in transportation costs and storekeeping costs can also be contributing factors to material price
variance.

Reasons for direct cost variances

Price
Efficiency Variance
Variance
Unreasonable materials price standard Unreasonable materials quantity standard
(unreasonable SP). (unreasonable SQ).
Change in purchase price (e.g. new supplier, Change in the quantity of spoiled materials due to the
change in quantity of materials purchased, changes in quality / equipment / technology,
Direct change in purchase discount). equipment malfunction, worker damage, etc.
Materials
Accounting error (in the actual price of materials). Accounting error (in quantity of materials used).
Normal fluctuation in the usage of materials.
Change in production processes.
Theft of raw materials.
Unreasonable labor price standard. Unreasonable labor hours standard.
Changes in average wages paid to employees Change in the average labor hours due to the changes
(e.g. changes in workers’ experience and skills, in workers’ experience and skills, in production
in the minimum wage rate, labor union strikes). processes or equipment, intentional workers’
Direct slowdown, etc.
Labor
Accounting error (in the actual price of direct Accounting error (in the actual quantity of labor hours).
labor).
Overtime hours (unanticipated). Normal fluctuation in labor hours.
Underreporting of labor hours.

As we can see from the table above, there are many reasons for direct cost variances. It is important for management
to analyze such reasons and take action. For example, when cost standards are unreasonable, they could cause
unfavorable variances. In such a case, management should review and change cost standards.

Variance analysis can be performed not only to calculate and interpret direct cost variances, but it can also be used
to monitor factory overhead costs.

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