Budgeting Basics and Beyond

8.6. Material Variances

Quantity and delivery standards have to be established before a standard price per unit can be determined. Material price standards are set by the purchasing manager because he or she has knowledge of price date and market conditions. The manager should increase the initial standard price per unit to a standard weighted -average price per unit to incorporate expected price increases for the period. The standard price should reflect the total cost of buying the material, which includes the basic price less discounts plus freight, receiving, and handling. The standard price must coincide with the specific quality material. In setting the material price standard, the price should be in accord with the firm 's inventory policies regarding the most economical order size and/or frequency of ordering. It is further assumed that buying, shipping, and warehousing will occur on favorable terms. Special bargain prices are ignored unless they are readily available. The material price standard should include normal or unavoidable spoilage allocations.

The material price variance can be used to evaluate the activity of the Purchasing Department and to see the impact of raw material cost changes on profitability. A material price variance may be isolated at the time of purchase or usage.

The material quantity variance is the responsibility of the production supervisor. Material quantity standards should include not only the raw materials but also purchased parts, cartons, ...