Material Cost Variance Formulas

For material operations, three types of variances are shown: cost, quantity, and yield. Cost variances arise when the cost of material is either more or less expensive than the planned cost. Quantity cost variances arise when the material quantity per parent used in production is either larger or smaller than the planned quantity per parent. Yield variances result when the components issued differ from the planned components due to differences between the planned and actual yield and scrap percentages.

The following formulas are used to calculate material cost variances for a work order.

Cost Variance

This formula isolates the cost of the components from the other variables; therefore, the quantity must be fixed at the actual quantity of material used.

(Actual Material Qty x Planned Material Unit Cost) - Actual Total Material Cost

Quantity Variance

This formula shows the effect that quantity has on cost; therefore, the cost must be fixed. The planned total quantity for the number of parents completed and scrapped is compared to the actual total quantity used, but the cost is fixed at the original planned unit cost.

(Parent Qty Completed + Parent Qty Scrapped) x Planned Qty Per Parent x Planned Unit Cost - Actual Qty Issued x Planned Unit Cost

Yield Variance

This formula shows the cost effect of scrapping more or less parents and/or components than were planned; therefore, the unit cost must be fixed at the original planned cost. This percentage is accurate only if all material has been issued and all parents have been completed.

Planned Component Qty x Planned Unit Cost - Actual Component Qty x Planned Component Unit Cost

In each case, the actual amount is subtracted from the planned amount so that an unfavorable variance is reported as a negative value.

Labor Variance

For labor operations, three types of variances are shown: labor cost, performance, and yield. When the actual cost of labor differs from the planned labor cost, a labor cost variance results. A performance variance arises when the actual production time differs from the planned production time. Yield variances result when the number of parent items scrapped differs from the planned scrap quantity.

The following formulas are used to calculate labor cost variances for a work order.

Labor Cost Variance

This formula shows the variance associated with the amount paid for labor using the actual hours instead of the planned hours.

(Actual Labor Hours x Planned Labor Rate) - Actual Labor Cost

Performance Variance

This formula shows how the production time variances contribute to the cost variance. The labor rate remains constant at the planned labor rate, and is multiplied by the difference between the actual time taken to produce the products and the planned time to produce the products.

Planned Hours x Planned Hourly Rate - (Parents Completed + Parents Scrapped) x Hours Per Parent x Planned Hourly Rate

Yield Variance

This formula shows the cost effect of scrapping more or less parents than were planned. The labor rate must be constant at the planned labor rate. This percentage is accurate only if all material has been issued and all parents have been completed.

Planned Labor Hours x Planned Labor Rate - (Parent Items Produced + Parent Items Scrapped) x Planned Hours Per Parent x Planned Labor Rate

Again, the actual amount is subtracted from the planned amount so that an unfavorable variance is reported as a negative value.

Because there are different formulas for material and labor variances, the Variance from Standards Report prints material information first, followed by the operation step information. Only those components and operations that have one or more variances in excess of the threshold percentage are reported.

For more information, see:

Cost Variance Formulas