Material Cost Variance (MCV) is the difference between the standard cost of the material allowed (standard material) for the output to be achieved and the actual cost of the material used.
ICMS has defined MCV as the difference between the standard direct material cost of actual production volume and the actual cost of direct material.
It is the aggregate of material price and usage variance. The main reasons for MCV are that the actual rate per unit cost is different than the standard rate per unit, or the actual quantity used for actual production is different from standard units for actual production.
Material cost variance is an important factor in cost accounting because it provides a cost base for production processes and helps to manage variations in the cost of producing the product.
Formula to Calculate Material Cost Variance
The formula to compute Material Cost Variance is as follows:
Material Cost Variance (MCV) = Standard Cost of the Material for Actual Output – Actual Cost of the Material Used
MCV = Material Price Variance + Material Usage or Quantity Variance
MCV = Material Price Variance + Material Mix Variance + Material Yield Variance
In order to compute the MCV, it is required to know:
a. The standard quantity of the materials that should have been required to produce the actual output. Hence, the standard quantity of materials is = Actual Output x Standard Quantity of the Materials Per Unit
b. Standard Price Per Unit of Materials
c. Actual Quantity of Materials Used
d. Actual Price Per Unit of Materials
Causes of Material Cost Variance
There are a number of factors that can cause MCV, including:
Changes in supplier prices: If the supplier of material raises its prices, this will cause an MCV.
Changes in material specifications: If the specifications of a material change, this can cause an MCV.
Inefficient material usage: If workers are using more materials than is necessary, this will cause an MCV.
Scrap or rework: If products are scrapped or reworked due to defects, this will cause an MCV.
Who is Responsible for Material Cost Variance (MCV)?
Generally, the purchase manager is held responsible for the material cost variance, but it is fine as long as it arises due to material usage variance. It is directly attributable to wrong planning and estimation by the manager.
However, we cannot hold him responsible for the variance arising due to an increase in the market price of the materials. It is beyond his control. What the manager can do in case of an increase in prices from the previous supplier is find an alternative supplier who can deliver the same quality of material at lower prices.
However, it is not very certain that supplies will be managed at a lesser price every time.
Significance of Material Cost Variance
When analyzing MCV, it is important to identify the root cause of the variance. Once the root cause is identified, managers can take steps to correct the problem. For example, if MCV is caused by changes in supplier prices, managers may need to negotiate with suppliers to lower their prices. If MCV is caused by inefficient material usage, managers may need to provide additional training to workers.
MCV is a valuable tool for managers to identify and analyze areas of cost inefficiency in their production processes. By understanding the causes of MCV, managers can take steps to control costs and improve profitability.