Direct material variances are also known as material cost variances. The material cost variance is the difference between the standard cost of materials that should have been incurred for manufacturing the actual output and the cost of materials that have been actually incurred. Material Cost Variance consists of:
- Material Price Variance and
- Material Usage Variance: Material usage variance may further be subdivided into Material Mix Variance and Material Yield Variance.
In other words, direct material variance or Material cost variance is the difference between standard materials cost and actual materials cost. Material cost variance arises due to a change in the price of materials and variations in the use of the number of materials. Material cost variance is ascertained as such:
Materials Cost Variance = Standard Material Cost – Actual Material Cost
Standard Material Cost = Standard Price per unit x Standard Quantity of materials
Actual Material Cost = Actual price per unit x Actual quantity of materials.
If the standard cost is more than the actual cost, the variance will be favourable and on the other hand, if the actual cost is more than the standard cost, the variance will be unfavourable or adverse.