The direct materials (DM) variance is computed by comparing the total actual cost and total standard cost of the raw materials. In this case, the actual price per unit of materials is \(\$6.00\), the standard price per unit of materials is \(\$7.00\), and the actual quantity used is \(0.25\) pounds. Businesses that use the standard costing system to value inventory need to estimate standard prices and quantities for all direct materials. You’ll use those figures to track the manufacturing process in your accounting software.
If the actual price paid per unit of material is lower than the standard price per unit, the variance will be a favorable variance. A favorable outcome means you spent less on the purchase of materials than you anticipated. If, however, the actual price paid per unit of material is greater than the standard price per unit, the variance will be unfavorable. An unfavorable outcome means you spent more on the purchase of materials than you anticipated. In this case, the production department performed efficiently and saved 40 units of direct material. Multiplying this by the standard price per unit yields a favorable direct material quantity variance of $160.
The materials quantity variance calculation presented previously
shows the actual quantity used in production of 399,000 pounds is
lower than the expected (budgeted) quantity of 420,000 pounds. Clearly, this is favorable because the actual quantity
used was lower than the expected (budgeted) quantity. In general, the production department of the company is responsible for direct materials quantity variance since it has direct control over the usage of materials. However, other departments may also be accountable if they cause indirect influence to such variance (e.g. low-quality materials acquired by the purchasing department).
With either of these formulas, the actual quantity purchased refers to the actual amount of materials bought during the period. The actual price paid is the actual amount paid for materials per unit. If there is no difference between the standard price and the actual price paid, the outcome will be zero, and no price variance exists. As you’ve learned, direct materials are those materials used in the production of goods that are easily traceable and are a major component of the product.
Favorable Direct Material Price Variance
In this case, the actual quantity of materials used is \(0.20\) pounds, the standard price per unit of materials is \(\$7.00\), and the standard quantity used is \(0.25\) pounds. Figure 10.35 shows the connection between the direct materials price variance and direct materials quantity variance to total direct materials cost variance. Figure 8.3 shows the connection between the direct materials price variance and direct materials quantity variance to total direct materials cost variance. Like direct materials price variance, this variance may be favorable or unfavorable.
This calculation helps businesses understand the efficiency of their material usage and identify areas for improvement. Direct material price variance is the difference between what was actually spent on the raw materials purchased during a period and the standard cost that would apply if the materials were bought at the standard rate. To calculate the variance, we multiply the actual purchase volume by the standard and actual price difference.
- A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.
- During the recent period, Teddy Bear Company purchased 20,000 bags of stuffing material for manufacturing stuff toys.
- As a result of this favorable outcome information, the company may consider continuing operations as they exist, or could change future budget projections to reflect higher profit margins, among other things.
- The materials quantity variance calculation presented previously
shows the actual quantity used in production of 399,000 pounds is
lower than the expected (budgeted) quantity of 420,000 pounds.
- All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
The amount of materials used and the price paid for those materials may differ from the standard costs determined at the beginning of a period. A company can compute these materials variances and, from these calculations, can interpret the results and decide how to address these differences. As is the case when analyzing other variances, the direct material price variance needs to be assessed in the context of other relevant variances and factors, such as direct material price variance and direct labor variances. The management therefore needs to assess performance while taking all these relevant factors into account.
Direct Materials Efficiency Variance
Direct material quantity variance is calculated to determine the efficiency of the production department in converting raw material to finished goods. In order to improve efficiency, wastage of raw material must be reduced. A negative value of direct material quantity variance is generally unfavorable and it implies that more quantity of direct material has been used in the production process than actually needed. A positive value of direct material quantity variance is favorable implying that raw material was efficiently converted to finished goods. The purchase price variance is the difference between the standard and actual cost per unit of the direct materials purchased, multiplied by the standard number of units expected to be used in the production process. These thin margins are the reason auto
suppliers examine direct materials variances so carefully.
Estimate the standard material quantity
A material quantity variance points to a lack of efficiency during the manufacturing process. If it’s not because of defective materials, look into how your factory workers are trained. Factory workers who receive insufficient training won’t work at maximum efficiency, wasting more material than is necessary for production. Each bottle has a standard material cost of 8 ounces at $0.85 per ounce.
Inaccurate standard material quantity
You can calculate the standard quantity of materials by multiplying the standard quantity of materials per unit of output by the actual units of output produced in a given period. The material yield variance is the difference between the standard and actual number of units used in the production process, multiplied by the standard cost per unit. Each bottle has a standard material cost of \(8\) ounces at \(\$0.85\) per ounce. Calculate the material price variance and the material quantity variance. Find the materials quantity variance by multiplying the standard cost by the difference between the standard and actual quantities.
Direct Materials Price Variance
The difference between the actual quantity at standard price and the standard cost is the direct materials quantity variance. The total of both variances equals the total direct materials variance. In this case, the actual quantity of materials used is 0.50 pounds, the standard price per unit of materials is $7.00, and the standard quantity used is 0.25 pounds. This is an unfavorable outcome because the actual quantity of materials used was more than the standard quantity expected at the actual production output level. As a result of this unfavorable outcome information, the company may consider retraining workers to reduce waste or change their production process to decrease materials needs per box.
From the accounting records, we know that the company purchased and used in production 6,800 BF of lumber to make 1,620 bodies. Based on a standard of four BF per body, we expected raw materials usage to be 6,480 (1,620 bodies x 4 BF per blank). Notice how the cause free rental monthly rent invoice template of one variance might influence another
variance. For example, the unfavorable price variance at Jerry’s
Ice Cream might have been a result of purchasing high-quality
materials, which in turn led to less waste in production and a
favorable quantity variance.