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:
Value for Money audit is a comprehensive examination that provides an objective and constructive assessment of the extent to which financial, human and physical resources are managed with due regard to economy, efficiency, and effectiveness; and accountability relationships are served.
Materials price variance arises due to the standard price specified and the actual price paid. It may also arise due to:
- Changes in basic prices of materials,
- failure to purchase the quantities anticipated at the time when standards were set,
- failure to secure discount on purchases,
- failure to make bulk purchases and incurring more on freight, etc.,
- failure to purchase materials at the proper time, and
- Not taking a cash discount when setting standards.
Materials Price Variance= Actual Quantity (Standard price–Actual price) In this case actual quantity of materials used is taken. The price of materials is taken per unit. If the answer is in plus, the variance will be favorable and it will be unfavorable if the result is negative.
Ayariga Ltd acquired its head office on 1 January 2007 at a cost of TZS 10 million (excluding land). The company’s depreciation policy is to depreciate the property over 50 years on a straight-line basis. The estimated residual value is zero.