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