What you’ll learn to do: Discuss different types of material variances

As the production manager at Z-Corp, a manufacturer of computer circuit boards, you are reviewing your direct material costs and notice a variance in the amount spent this year compared to the budgeted amount. Your manager is concerned about this increase and has asked you to analyze it to find out what has happened. You check in with your purchasing department to get some information, and find that not only did you purchase a higher quantity of one particular component for your boards, but strangely, the price for this component was lower than you had budgeted. How could this happen? Your purchasing department purchased at a lower  price, but ended up needing to order a larger quantity?

Let’s look at some scenarios and examples of how these types of variances might occur, and what we can do to fix the problem.