On the Decomposition of Direct Material Variances.

Abstract A general model for the decomposition of material variances is developed. Without constraining the production function, the model allows for the revision of the optimal mix of input materials to actual prices. In the model, a production adjustment variance captures the dollar impact of the ex post and ex ante optimal mix being different. Variances computed under this model are consistent with the operation of a standard costing system, are readily interpretable, and are consistent with accepted definitions of price, mix, and yield variances.