## **Learning Outcomes**

After working through this article, you will be able to calculate material price and usage variances, interpret whether each is favourable or adverse, explain what each variance measures, identify typical causes, and decide which manager is usually responsible. You will also understand how to apply these concepts effectively within the ACCA Performance Management (PM) exam.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you must be able to explain, calculate, and analyse material price and usage variances as essential elements of standard costing and basic variance analysis. Focus your revision on the following tasks:

- Calculate material price and usage variances for direct materials
- Distinguish between price and usage variances, and interpret their meanings
- Identify likely causes for adverse and favourable variances
- Explain which variances are controllable by purchasing or production managers
- Discuss the role of controllable and uncontrollable costs in performance appraisal

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What question does a material price variance answer about a company’s costs?
2. Who is normally held responsible for an adverse material usage variance, and why?
3. A product requires 5 kg of material at \$6 per kg. Actual output was 800 units, with 4,300 kg purchased and used at a total cost of \$27,950. Calculate:
   a. The material price variance
   b. The material usage variance
4. Explain why price and usage variances may be linked in real-world scenarios.

## **Introduction**

Variance analysis helps managers understand how well actual performance matched planned (standard) performance for material costs and usage. By examining _how much_ was paid for materials (price variance) and _how much_ material was used to produce output (usage variance), management can quickly identify areas in need of attention and assign responsibility for corrective action.

> **Key Term: Variance**
> The difference between actual and standard performance, measured in monetary terms.

## **MATERIAL PRICE AND USAGE VARIANCES**

Material cost control divides the total variance for direct materials into two clear components:

- **Material price variance**: Did the business pay more or less per unit than expected?
- **Material usage variance**: Did the business use more or less material than the budget allowed for the actual output?

These components help management pinpoint causes of overspending or inefficiency.

> **Key Term: Material price variance**
> The monetary effect of a difference between the actual price paid and the standard price allowed, multiplied by the actual quantity purchased or used.
>
> **Key Term: Material usage variance**
> The difference in cost between actual material consumed and the standard allowed for output achieved, valued at the standard price.

### Calculating Material Price Variance

This answers: “Did we pay the price we expected for the materials actually bought?” It is typically based on the total quantity purchased, unless directed otherwise.

Formula:

Material price variance = (Standard price − Actual price) × Actual quantity

- **Favourable**: Actual price is less than standard.
- **Adverse**: Actual price is higher than standard.

### Calculating Material Usage Variance

This variance asks: “Was material used more or less efficiently than planned, for the actual output achieved?”

Formula:

Material usage variance = (Standard quantity − Actual quantity used) × Standard price

- **Favourable**: Less material was used than expected for actual output.
- **Adverse**: More material was used than allowed by standard.

> **Key Term: Standard price**
> The pre-determined, expected cost per unit of material used for variance analysis.
>
> **Key Term: Standard quantity**
> The amount of material allowed according to the standard, for the actual output achieved.

### The Link Between Price and Usage Variances

Price and usage variances are often connected. For example, buying cheaper (lower quality) material may create a favourable price variance but an adverse usage variance, as more is wasted or scrapped.

### Typical Causes and Managerial Responsibility

Understanding causes is critical for effective control:

- **Material price variances** may be due to:
  - Market price increases or decreases
  - Bulk discounts (or missed discounts)
  - Purchase from alternative suppliers
  - Emergency or unplanned purchases
  - Cheaper/lower quality material

  Usually the responsibility of the purchasing manager.

- **Material usage variances** may result from:
  - Inferior or higher quality material
  - Poor production methods or supervision
  - Staff inexperience, lack of training, or equipment faults
  - Production design changes not communicated or planned
  - External factors such as customer or design specification changes

  Usually the responsibility of the production manager.

> **Key Term: Controllable cost**
> A cost that a manager has the authority to influence through their own actions or decisions.

## **Assigning Responsibility and Investigating Variances**

The principle of controllability states that managers should only be held accountable for costs (and thus for variances) they can realistically influence.

If an adverse price variance results from a sudden market price spike (outside control), blame cannot fairly be placed on the purchasing manager. Conversely, if an adverse usage variance is due to poor staff training, responsibility lies within production management control.

## **Worked Example 1.1**

**Scenario:**  
A business expects to use 3 kg of material at \$7 per kg for each unit produced. Actual output for the period was 400 units. Actual material purchased and used was 1,320 kg at a total cost of \$9,504.

**Required:**  
Calculate:
a) Material price variance  
b) Material usage variance

> **Answer:**
>
> **Standard quantity** allowed for output: 400 units × 3 kg = 1,200 kg
> a) **Actual price per kg** = \$9,504 / 1,320 kg = \$7.20  
> Material price variance = (Standard price − Actual price) × Actual quantity  
> = (\$7.00 − \$7.20) × 1,320 = (−\$0.20) × 1,320 = **\$264 Adverse**
> b) Material usage variance = (Standard quantity − Actual quantity) × Standard price  
> = (1,200 − 1,320) × \$7.00 = (−120) × \$7.00 = **\$840 Adverse**

## **Interpreting Variances in Practice**

Material price and usage variances provide a direct signal for performance review:

- If both variances are adverse, material costs are higher than planned, requiring urgent attention.
- If price variance is favourable but usage is adverse, check if lower quality material contributed to excess usage.
- If usage is favourable but price is adverse, investigate whether higher quality/higher cost material resulted in greater efficiency.

### **Worked Example 1.2**

**Scenario:**  
A business achieves a favourable price variance by purchasing material at a lower price. During the same period, the business reports an adverse usage variance.

**Required:**  
Discuss possible reasons and accountability.

> **Answer:**
>
> Likely, the purchasing manager acquired cheaper but lower quality material, increasing waste and thus adverse usage. While the purchasing manager is credited for the price saving, the production manager may be responsible for controlling process efficiency. Both managers should review whether the total outcome benefits the business.

### **Exam Warning**

When answering exam questions, do not simply assign all adverse variances to operational managers—always consider what was controllable and whether external causes may apply.

### **Revision Tip**

Always state whether your calculated variances are favourable or adverse, and identify who should be held responsible. This helps secure professional marks in ACCA PM constructed response questions.

## **Summary**

Understanding and calculating material price and usage variances enables better cost control and targeted management action. Correctly interpreting variances ensures fair appraisal, supports improvement, and helps you secure ACCA PM marks. Always consider both the numerical and managerial implications.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Calculate material price and material usage variances for direct materials
- Recognize the causes and implications of favourable and adverse variances
- Apply formulae clearly and state whether each variance is favourable or adverse
- Attribute responsibility for variances according to the principle of controllability
- Explain how price and usage variances can affect one another in practice

## **Key Terms and Concepts**

- Variance
- Material price variance
- Material usage variance
- Standard price
- Standard quantity
- Controllable cost


Basic variances - Material price and usage variances