Material Cost Variance
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 cost of the actual rate per unit is different than the standard rate per unit, or the actual quantity used for actual production is different from standard units for actual production.
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
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 out for an alternative supplier who can deliver the same quality of material at lesser prices.
However, it is not very certain that supplies will be managed at a lesser price every time.