Management Notes

# Management Notes

Reference Notes for Management

# Material Usage Variance – Variance Analysis | Standard Costing

## Material Usage Variance

➦ Material Usage variance (MUV) is the difference between the standard quantity in production and the actual quantity consumed in production.

➦ During the production process, if the raw materials used in the production differ from the standard quantities that have been used to produce the output then this will result in MUV.

➦ MUV is the deviation of the ratio of the actual quantity of materials consumed for the actual output from the standard quantity of materials to be consumed for the actual output.

➦ The deviation of this quantity is to be multiplied by the standard price to convert the quantity into monetary value.

➦ MUV is favorable when the actual quantity of direct materials used is less than the total standard quantity allowed for the actual output.

➦ The concept of material usage variance refers to the difference between the actual usage of materials in the production process versus the standard usage based on the amount of output produced.

➦ The difference between the actual and expected material quantities used in a process is measured as an actual quantity.

➦ As a result of the production plan and the expected efficiency of the production process, the standard quantity of material is determined.

## Material Usage Variance Formula

The following formula can be used to calculate material usage variance:

• Material usage variance = (Standard quantity of material allowed for actual output – Actual quantity of material used) x Standard price of material

= (SQ-AQ)*SP

where,

• SQ =  Standard Quantity
• SP = Standard Price
• AQ = Actual Quantity

➦ The variance indicates that more material was used than expected, thereby resulting in higher material costs if the actual amount of material used in production exceeds the expected amount.

➦ Conversely, if the actual amount of material used is less than the expected amount, then the variance is favorable, indicating that less material was used than expected, which can result in lower material costs.

➦ Materials usage variances need to be identified and analyzed regularly to identify their root causes, such as material quality, production efficiency, or even inaccurate planning.

➦ To reduce costs and increase profitability, managers need to understand these variances to improve the production process and minimize waste.

## Causes of Material Usage Variance

Material usage variance can be caused by several factors, including:

➥ The use of poor-quality materials can result in higher levels of waste, resulting in a higher variance in material usage.

➥ A poor production process can result in a higher variance in material usage because more material is used than expected to produce the desired output.

➥ A defective machine can result in excessive material usage as a result of compensating for defects or problems during the production process.

➥ Material usage variance can be caused by inaccurate planning, such as inaccurate production planning, inventory management, or forecasting.

➥ A higher variance in material usage results from operator error, including incorrect measuring, misjudging the required amount of material, or not following standard procedures.

➥ A change in product design or specification can result in a change in the amount of material needed, resulting in variances in material usage.

➥ Theft and pilferage of materials can affect material usage variance since less material is actually used than expected.

### What is material usage variance in cost accounting?

The material usage variance is a cost accounting concept that measures the difference between the amount of material used in production and the amount that should have been used based on standard cost.

The material usage variance is calculated by multiplying the difference between the actual quantity of material used and the standard quantity by the standard cost per unit.

An unfavorable (adverse) variance indicates that a greater amount of material was used than was necessary if the actual quantity was greater than the standard quantity.

The variance is favorable if the actual quantity of material used is less than the standard quantity, indicating that less material was used than anticipated.

A variance in material usage can help identify waste and scrap in the production process, as well as evaluate the effectiveness of material management policies.

To reduce material costs and improve profitability, companies can analyze material usage variance to identify areas where improvements can be made.

### What is material cost variance and material usage variance?

The variance between actual and expected costs of materials used in production is measured using material cost variance and material usage variance in cost accounting.

Material cost variance refers to the difference between the actual cost of materials used and the standard cost of materials expected to be used for a given level of production.

It measures the difference between the actual cost of the materials and the standard price set for those materials. The following formula can be used to calculate material cost variance:

• Material Cost Variance = (Actual Quantity of Materials Used x Actual Price per Unit) – (Standard Quantity of Materials Allowed x Standard Price per Unit)

Conversely, material usage variance indicates how much material is used versus how much material is expected to be used at a given level of production.

As a result, material usage variance is the difference between the amount of materials consumed and what was expected of those materials. The formula for calculating material usage variance is as follows:

• Material Usage Variance = (Actual Quantity of Materials Used – Standard Quantity of Materials Allowed) x Standard Price per Unit

Companies can use material cost variance as well as material usage variance to identify areas where they can reduce costs and improve their material management processes.

A company’s material cost variance can indicate whether it is paying too much or too little for materials, whereas its material usage variance indicates whether it uses materials efficiently.

### What is the difference between material price variance and material usage variance?

Variance Definition Formula
Material Price Variance The difference between the actual cost of materials purchased and the standard cost of materials that should have been purchased. MPV = (AQ x AP) – (AQ x SP)
Material Usage Variance The difference between the actual amount of materials used and the standard amount of materials that should have been used. MUV = (AQ x SP) – (SQ x SP)

Where:

• AQ: Actual quantity of materials purchased or used
• AP: Actual price per unit of materials purchased
• SP: Standard price per unit of materials
• SQ: Standard quantity of materials that should have been used

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