Summary Report on Material Variances and Its Types

Introduction:

Material variances refer to the differences between the actual cost of materials
used in production and the standard cost or expected cost of materials. These
variances play a crucial role in assessing the efficiency of the material
management process and identifying areas for improvement. By analysing
material variances, businesses can make informed decisions to control costs,
improve operational efficiency, and enhance profitability. This report provides
an overview of material variances, explains their types, and includes relevant
concepts, diagrams, and graphs to illustrate the analysis.

1. Concept of Material Variances:

Material variances are discrepancies between the standard or expected cost of

materials and the actual cost incurred during production. They arise due to
factors such as changes in material prices, usage, quality, or wastage. Material
variances can be unfavourable (adverse) or favourable, depending on whether
the actual cost is higher or lower than the standard cost. Analysing material
variances helps identify the causes of cost discrepancies, improve resource
allocation, and enhance overall efficiency.

2. Types of Material Variances:

a) Price Variance: The price variance represents the difference between the
actual price paid for materials and the standard price per unit. It indicates how
effectively an organization procures materials at the expected cost. The formula
for calculating the price variance is:

Price Variance = (Actual Price - Standard Price) x Actual Quantity

b) Usage Variance: The usage variance reflects the difference between the
actual quantity of materials used and the standard quantity specified for
production. It measures the efficiency of material utilization. The formula for
calculating the usage variance is:

Usage Variance = (Actual Quantity - Standard Quantity) x Standard Price

c) Mix Variance: The mix variance arises when there is a deviation in the
composition of materials used compared to the standard mix specified. It
assesses the impact of using different proportions of materials on costs. The
formula for calculating the mix variance is:

Mix Variance = (Actual Mix Ratio - Standard Mix Ratio) x Standard Quantity x
Standard Price
d) Yield Variance: The yield variance represents the difference between the
actual output achieved and the standard output expected from a given
quantity of materials. It helps evaluate the effectiveness of production
processes and the amount of wastage. The formula for calculating the yield
variance is:

Yield Variance = (Standard Quantity - Actual Quantity Produced) x Standard

Price

3. Diagrams and Graphs:

a) Price Variance Diagram:

A diagram illustrating the price variance helps visualize the relationship

between the actual price and the standard price. It shows how deviations in
price affect the overall cost of materials. The diagram can be a simple line
graph with the x-axis representing time or production batches and the y-axis
representing the price variance in currency units.
b) Usage Variance Diagram:

A diagram depicting the usage variance showcases the difference between the
actual quantity used and the standard quantity specified. It helps identify
patterns of over-usage or under-usage of materials. The diagram can be a bar
chart comparing the actual and standard quantities, with each material item
represented by a different colour.

c) Mix Variance Diagram:

A mix variance diagram visually represents the deviations in the composition of

materials used. It compares the actual mix ratio to the standard mix ratio,
highlighting variations and their impact on costs. The diagram can be a pie
chart showing the percentage distribution of different materials in the actual
and standard mixes.

d) Yield Variance Graph:

A yield variance graph provides insights into the differences between the actual
and standard output achieved. It helps track variations in production efficiency
and wastage levels. The graph can be a line graph with the x-axis representing
time or production batches and the y-axis representing the yield variance in
units produced.
Conclusion:

Material variances play a crucial role in assessing the efficiency of material

management

and controlling costs in production processes. By analysing price variances,

usage variances, mix variances, and yield variances, organizations can identify
areas for improvement, make informed decisions, and enhance profitability.
The concepts, diagrams, and graphs presented in this report provide a visual
representation of material variances, aiding in their understanding and
application. By effectively managing and controlling material variances,
businesses can optimize resource utilization, improve operational efficiency,
and achieve sustainable growth.