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Direct Material Quantity Variance Formula and Calculation

In a larger manufacturing operation, it is best to calculate this variance at the individual product level, since it reveals little actionable information at an aggregate level. The resulting information is used by the production manager and purchasing manager to investigate and correct problems. The variance is most commonly used in a production environment, but can also be used in a services business where hours worked can be compared to a budgeted level.

For auto suppliers that use hundreds of tons of steel each year, this had the unexpected effect of increasing expenses and reducing profits. For example, a major producer of automotive wheels had to reduce its annual earnings forecast by $10,000,000 to $15,000,000 as a result of the increase in steel prices. During the month of March, the following quantities of materials were sent to the factory and 32,340 tons of product K was actually produced. Managers can better address this situation if they have a breakdown of the variances between quantity and price.

Causes of unfavorable direct materials quantity variance

Direct materials price variance pertain to the difference in purchase costs of the materials versus standard or budgeted costs. If the total actual cost is higher than the total standard cost, the variance is unfavorable since the company paid more than what it expected to pay. If the total actual cost incurred is less than the total standard cost, the variance is favorable. The same calculation is shown using the outcomes of the direct materials price and quantity variances.

This is offset by a larger unfavorable direct materials price variance of $2,520. The net direct materials cost variance is still $1,320 (unfavorable), but this additional analysis shows how the quantity and price differences contributed https://online-accounting.net/ to the overall variance. The standard cost of actual quantity purchased is calculated by multiplying the standard price with the actual quantity. This amount will represent the expected expenditure on direct material for this many units.

The direct materials price variance of Hampton Appliance Company is unfavorable for the month of January. This is because the actual price paid to buy 5,000 units of direct material exceeds the standard price. These thin margins are the reason auto suppliers examine direct materials variances so carefully. Any unexpected increase in steel prices will likely cause significant unfavorable materials price variances, which will lead to lower profits.

Premium Furniture, a US based Inc., uses a standard costing system to control its direct materials and conversion costs. During the month of December 2022, its workers used 3,750 feet of timber to finish 1,500 office chairs. The standard length of timber allowed to manufacture an office chair is 2.75 feet and the standard rate per foot of timber is $3.50. How much is the direct materials quantity variance of Prime Furniture Inc. for the month of December 2022? When a company makes a product and compares the actual materials cost to the standard materials cost, the result is the total direct materials cost variance.

Question 1

The following sections explain how management can assess potential causes for a favorable or adverse material price variance and devise a suitable response to the variation. The standard price of $100 per bag was allowed in the budget, but the purchase manager was able to source the materials from a cheaper supplier at the cost of $80 per bag. The total price variance during January is negative $ 500 ($ 1,000 – $ 300  – $ 200), and it will impact the cost of goods sold in the statement of profit and lose. It will reduce the cost of goods sold and increase net income for the period.

It is one of the variances which company need to monitor beside direct material usage variance. A favorable direct material yield variance means a higher production than the standard or expected production based on the standard input quantities of materials. An unfavorable variance, on the other hand, means lower production than the standard production based on standard input quantity. Using excessive direct materials than allowed by standards often results in higher total direct materials cost. The difference column shows that 200 fewer pounds were used than expected (favorable).

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An unfavorable outcome means you used more materials than anticipated to make the actual number of production units. With either of these formulas, the actual quantity used refers to the actual amount of materials used at the actual production output. The standard quantity is the expected amount of materials used at the actual production output. If there is no difference between the actual quantity used and the standard quantity, the outcome will be zero, and no variance exists. 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.

Let us assume further that during the given period, 100 widgets were manufactured, using 212 kg of unobtainium which cost $ 13,144. Mark P. Holtzman, PhD, CPA, is Chair of the Department of Accounting and Taxation at Seton Hall University. He has taught accounting at the college level for 17 years and runs the Accountinator website at , which gives practical accounting advice to entrepreneurs. This may be caused by an incorrect initial sales assumption regarding the number of units that will be sold.

What Causes a Direct Material Usage Variance

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If a company’s actual quantity used exceeds the standard allowed, then the direct materials quantity variance will be unfavorable. This means that the company has utilized more materials than expected and may have paid extra in materials cost. Angro Limited, a single product American company, employs a proper standard costing system. The normal wastage and inefficiencies change in net working capital are taken into account while setting direct materials price and quantity standards. Variances are calculated and reported at regular intervals to ensure the quick remedial actions against any unfavorable occurrence. 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.

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The combination of the two variances can produce one overall total direct materials cost variance. To apply this method to the Band Book example, take a look at the next diagram. Direct materials actually cost $297,000, even though the standard cost of the direct materials is only $289,800. The actual quantity of direct materials at standard price equals $310,500. The purchasing staff of ABC International estimates that the budgeted cost of a chromium component should be set at $10.00 per pound, which is based on an estimated purchasing volume of 50,000 pounds per year.

The direct material price variance is also known as the purchase price variance. 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. The direct material price variance is also known as direct material rate variance and direct material spending variance. Direct materials quantity variance is also known as direct material usage or volume variance.

• In our example, the standard direct materials cost to manufacture one computer case is $22.80.
• Variances are calculated and reported at regular intervals to ensure the quick remedial actions against any unfavorable occurrence.
• The company needed the materials on short notice and paid overnight freight charges to obtain them.
• When a company makes a product and compares the actual materials cost to the standard materials cost, the result is the total direct materials cost variance.

The difference between this actual expenditure and the actual expenditure on direct material is the direct materials price variance. The total direct materials cost variance is also found by combining the direct materials price variance and the direct materials quantity variance. By showing the total materials variance as the sum of the two components, management can better analyze the two variances and enhance decision-making. The direct material usage variance is the difference between the actual and expected unit quantity needed to manufacture a product. The variance is used in a standard costing system, usually in conjunction with the purchase price variance.

The company needed the materials on short notice and paid overnight freight charges to obtain them. During the recent period, Teddy Bear Company purchased 20,000 bags of stuffing material for manufacturing stuff toys. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. GR Spring and Stamping, Inc., a supplier of stampings to automotive companies, was generating pretax profit margins of about 3 percent prior to the increase in steel prices. Direct materials refer to basic materials that form an integral part of a finished product. The company has changed suppliers, and the replacement supplier charges a different price.