Direct Materials Usage Variance

Material Cost Variances -

Under a standard costing system, production and inventories are reported at the standard cost—
including the standard quantity of direct materials that should have been used to make the products. If
the manufacturer actually uses more direct materials than the standard quantity of materials for the
products actually manufactured, the company will have an unfavorable direct materials usage
variance. If the quantity of direct materials actually used is less than the standard quantity for the
products produced, the company will have a favorable usage variance. The amount of a favorable and
unfavorable variance is recorded in a general ledger account Direct Materials Usage Variance.
(Alternative account titles include Direct Materials Quantity Variance or Direct Materials Efficiency
Variance.) Let's demonstrate this variance with the following information.

January 2006
In order to calculate the direct materials usage or quantity variance, we start with the number of
acceptable units of products that have been manufactured—also known as the good output. At
DenimWorks this is the number of good aprons physically produced. If DenimWorks produces 100
large aprons and 60 small aprons during January, the production and the finished goods inventory will
begin with the cost of the direct materials that should have been used to make those aprons. Any
difference will be a variance.

• NOTE
We are not determining the quantity of aprons that DenimWorks should have made. Rather,
we are determining whether the 100 large aprons and 60 small aprons that were actually
manufactured were produced efficiently. In the case of direct materials, we want to determine
whether or not the company used the proper amount of denim to make the 160 aprons that
were actually produced. (For the purposes of calculating the direct materials usage variance,
it does not concern us whether DenimWorks had a goal to produce 100 aprons, 200, aprons,
or 250 aprons.)

Standard costs are sometimes referred to as the "should be costs." DenimWorks should be using 278
yards of denim to make 100 large aprons and 60 small aprons as shown in the following table.

Large Aprons Small Aprons

Total
Actual aprons manufactured 100 60
Standard yards of denim per apron manufactured 2.0 yd. 1.3 yd.
Total standard yards of denim for the actual good aprons manufactured—the number of yards of
denim that should have been used to make the good output 200 78 yd. 278 yd.

We determine the total standard cost of the denim that should have been used to make the 160
aprons by multiplying the standard quantity of denim (278 yards) by the standard cost of a yard of
denim ($3 per yard):

Large Aprons Small Aprons

Total
Total standard yards of denim for the actual good (aprons) manufactured 200 yd. 78 yd.
278 yd.
Standard cost per yard $3 $3 $3
Standard cost of denim in the good output—the aprons actually produced in January $600
$234 $834
An inventory account (such as F.G. Inventory or Work in Process) is debited for $834; this is the
standard cost of the direct materials component in the aprons manufactured in January 2006.

The Direct Materials Inventory account is reduced by the standard cost of the denim actually
removed from the direct materials inventory. Let's assume that the actual quantity of denim removed
from the direct materials inventory and used to make the aprons in January was 290 yards. Because
Direct Materials Inventory reports the standard cost of the actual materials on hand, we reduce the
account balance by $870 (290 yards used $3 standard cost per yard). After removing 290 yards of
materials, the balance in the Direct Materials Inventory account is $2,130 (710 yards x $3 standard
cost per yard).

The Direct Materials Usage Variance is: [the standard quantity of material that should have been
used to make the good output minus the actual quantity of material used] X the standard cost per
yard.

In our example, DenimWorks should have used 278 yards of material to make 100 large aprons and
60 small aprons. Because the company actually used 290 yards of denim, we say that DenimWorks
did not operate efficiently—an extra 12 yards of denim was used (278 vs. 290 = 12). When we
multiply the 12 yards by the standard cost of $3 per yard, the result is an unfavorable direct materials
usage variance of $36.

Let's put the above information into a format commonly used for computing variances:

Direct Materials Usage/Quantity/Efficiency Variance Analysis

2. Credit Direct Materials Inventory for the actual yards of denim used x the standard cost per
yard of denim

3. Direct Material Usage Variance (Std Yd - Act Yd) x Std Cost 1. Debit Inventory-FG for the
standard yards of denim that should have been used to make the good output x the standard cost
per yard of denim
Act Yd x Std Cost Difference Std Yd x
Std Cost
290 act yd x $3 (12 yd) x $3 278 std yd x
$3
$870 $834
$36 Unfavorable

The journal entry for the direct materials portion of the January production is:

Date Account Name Debit Credit

Jan. 31, 2006 Inventory-FG 834

Direct Materials Usage Variance 36
Direct Materials Inventory 870

February 2006
Let's assume that in February 2006 DenimWorks produces 200 large aprons and 100 small aprons
and that 520 yards of denim are actually used. From this information we can compute the following:

Large Aprons Small Aprons

Total
Actual aprons manufactured 200 100
Standard yards of denim per apron manufactured 2.0 yd. 1.3 yd.
Total standard yards of denim for the actual aprons manufactured 400 yd. 130 yd.
530 yd.
Standard cost per yard $3 $3 $3
Standard cost of denim in the good output $1,200 $390 $1,590

Let's put the above information into our format:

Direct Materials Usage (or Quantity) Variance Analysis

2. Credit Direct Materials Inventory for the actual yards of denim used x the standard cost per
yard of denim

3. Direct Material Usage Variance (Std Yd - Act Yd) x Std Cost 1. Debit Inventory-FG for the
standard yards of denim that should have been used to make the good output x the standard cost
per yard of denim
Act Yd x Std Cost Difference Std Yd x
Std Cost
520 act yd x $3 10 yd x $3 530 std yd x
$3
$1,560 $1,590
$30 Favorable

The journal entry for the direct materials portion of the February production is:

Date Account Name Debit Credit

Feb. 28, 2006 Inventory-FG 1,590

Direct Materials Usage Variance 30
Direct Materials Inventory 1,560