Variances of Direct Material

Agenda
Standard Direct Materials Cost
Material Price Variance Material Quantity Variance

Computing and Analyzing Direct Materials Variances

Standard Direct Materials Cost

is found by multiplying the price standard for direct materials by the quantity standard for direct materials

Standard Direct Materials Cost

Direct Materials Price Standard

Direct Materials Quantity Standard

Standard Direct Materials Cost (contd)

Direct materials price standard
Careful estimate of the cost of a specific direct material in the next accounting period Developed by purchasing agent or purchasing department
Takes into account
All possible price increases Changes in available quantities New sources of supply

Standard Direct Materials Cost (contd)

Direct materials quantity standard
Estimate of the amount of direct materials that will be used in the accounting period
Includes scrap and waste

Influenced by
Product engineering specifications Quality of direct materials Age and productivity of machinery Quality and experience of work force

Established and monitored by

Production managers Management accountants Others
Engineers, purchasing agents, machine operators

Material Price Variance

1. Material price variance:(AP SP) x AQp 2. (AP) = actual price per unit of material.

3. (SP) = standard price per unit of direct material.

3. (AQp) = actual quantity of material purchased. 4. Actual price > standard price: unfavorable. 5. Actual price < standard price: favorable.

Material Quantity Variance

1. Material quantity variance: (AQu SQ)SP 2. (AQu) = actual quantity of material used.

3. (SQ) = standard quantity of material allowed.

4. (SP) = standard price of material. 5. Actual quantity > standard quantity: unfavorable. 6. Actual quantity < standard quantity: favorable.

Computing and Analyzing Direct Materials Variances

To control operations, managers compute and analyze variances for
Whole cost categories
Such as total direct materials costs

Elements of those categories

Such as the price and quantity of each direct material

The more detailed the analysis of a variance is, the more effective managers will be in controlling costs

Computing Direct Materials Variances

Total direct materials cost variance
Difference between the standard cost and actual cost of direct materials

Computing Direct Materials Variances

Cambria Company makes leather bags. Each bag should use 4 feet of leather (standard quantity), and the standard price of leather is $6.00 per foot. During August, the company purchased 760 feet of leather costing $5.90 per foot and used the leather to produce 180 bags

Standard cost Standard price standardquantity $6.00 per foot (180 bags 4 feet per bag) $6.00 per foot 720 $4,320 Less actual cost
Actual price actual quantity $5.90 per foot 760 4,484
This is an unfavorable (U) situation

Total direct materials cost varia nce

$ 164 (U)

Actual cost > standard cost

Computing Direct Materials Variances (contd)

Total direct materials cost variance must be broken into two parts to find the cause of the variance
Direct materials price variance Direct materials quantity variance

Computing Direct Materials Variances (contd)

Direct materials price variance
Difference between the standard price and the actual price per unit multiplied by the actual quantity purchased Also called the direct materials spending or rate variance
Direct Materials Price Variance (StandardPrice Actual Price) Actual Quantity ($6.00 $5.90) 760 feet $76 (F)
Because the company paid less for direct materials than it expected, the variance is favorable (F)

Computing Direct Materials Variances (contd)

Direct materials quantity variance
Difference between the standard quantity and the actual quantity used multiplied by the standard price Also called the direct materials efficiency or usage variance
Direct Materials Quantity Variance Standard Price (StandardQuantity Allowed Actual Quantity) $6.00 per foot (720 feet 760 feet) $240 (U)
Because the company used more for direct materials than it expected, the variance is unfavorable (U)

Computing Direct Materials Variances (contd)

Test calculations of variances
If correct, the net of the direct materials price variance and direct materials quantity variance will equal the total direct materials cost variance

Direct materials price variance Direct materials quantity variance Total direct materials cost variance

$ 76 (F) 240 (U) $164 (U)

Diagram of Direct Materials Variance Analysis

Actual Direct Material Purchased (APxAQ) $5.90 per ft. x 760 ft. = $4,484
Difference Equals

Material Inventory Purchased (SPxAQ) $6.00 per ft. x 760 ft. = $4,560
Difference Equals

Work in progress Inventory (SPxSQ) $5.90 per ft. x 720 ft. = $4,320

Direct Material Price Varience (SP-AP)xAQ $.10 per ft. x 760 ft. = $76(F)
Difference Equals

Direct Material Quantity Varience (SQ-AQ)xSP $6.00 per ft. x 40 ft. = $240(U)

Total Direct Material Cost Varience (Net of Direct material price varience and direct materials quantity varience) $76(F)-$240(U) = $164(U)

Analyzing and Correcting Direct Materials Variances

Company had been experiencing direct materials price variances and quantity variances for some time For three months, managers tracked
Purchasing activities
Discovered that the purchasing agent had purchased, without authorization, a lower grade of leather at a reduced price
After analysis, engineers determined the lower grade of leather was not appropriate

Scrap and rework

Discovered that inferior leather was causing the unfavorable quantity variance

Discussion
Q. What is the direct materials price variance?
A. It is the difference between the standard price and the actual price per unit multiplied by the actual quantity purchased. It is also called the direct materials spending or rate variance

Direct Materials Price Variance (StandardPrice Actual Price) Actual Quantity