How to Compute Direct Materials Variances

While the overall variance calculations provide signals about these issues, a manager would actually need to drill down into individual cost components to truly find areas for improvement. Blue Rail produces handrails, banisters, and similar welded products. This pipe is custom cut and welded into rails like that shown in the accompanying picture. A material quantity variance of zero means the company uses the same quantity of materials as its established standards. However, that is rarely the case as this variance might be above or below zero.

LABOR RATE VARIANCE

Like direct materials price variance, this variance may be favorable or unfavorable. If workers manufacture a certain number of units using a quantity of materials that is less than the quantity allowed by standards for that number of units, the variance is known as favorable direct materials quantity variance. On the other hand, if workers use the quantity that is more than the quantity allowed by standards, the variance is known as unfavorable direct materials quantity variance. If the actual quantity used is greater than the standard quantity, the variance is unfavorable. This means that the company has used excessive materials in producing its output. 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.

Management can then compare the predicted use of \(600\) tablespoons of butter to the actual amount used. If the actual usage of butter was less than \(600\), customers may not be happy, because they may feel that they did not get enough butter. If more than \(600\) tablespoons of butter were used, management would investigate to determine why. The direct materials quantity variance should be investigated and used in a way that does not spoil the motivation of workers and supervisors at work place. Variances occur in most of the manufacturing processes and for almost all cost elements.

Formula and Example

The above material quantity variance formula has the following components. The material quantity variance is also known as the material usage variance and the material yield variance. Similarly, a favorable quantity variance may be based on a baseline that is too generous. This means that an improperly high baseline will hide what may actually be an excessive amount of quantity usage.

The standard price is the expected price paid for materials per unit. 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 material quantity variance can yield unusual results, since it is based on a standard unit quantity that may not be even close to actual usage. If the standard is excessively generous, there will be a long series of favorable material quantity variances, even though the production staff may not be doing an especially good job. Conversely, a parsimonious standard allows little room for error, so there is more likely to be a considerable number of unfavorable variances over time. Thus, the standard used to derive the variance is more likely to cause a favorable or unfavorable variance than any actions taken by the production staff.

2: Compute and Evaluate Materials Variances

• In closing this discussion of standards and variances, be mindful that care should be taken in examining variances.
• Another element this company and others must consider is a direct materials quantity variance.
• In such cases, the responsibility of any unfavorable quantity variance would lie on the purchasing department.
• She frequently speaks on nonprofit, corporate governance–taxation issues and will probably come to speak to your company or organization if you invite her.
• 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 logic for direct labor variances is very similar to that of direct material. The total variance for direct labor is found by comparing actual direct labor cost to standard direct labor cost. If actual cost exceeds standard cost, the resulting variances are unfavorable and vice versa. The overall labor variance could result from any combination of having paid laborers at rates equal to, above, or below standard rates, and using more or less direct labor hours than anticipated. Generally, production department is responsible to see that material usage is kept in line with standards. However, purchasing department may be responsible for unfavorable materials quantity variance if it is caused by poor quality of materials.

Examine the following diagram and notice the $369,000 of cost is what is fiscal sponsorship ultimately attributed to work in process ($340,000 debit), materials price variance ($41,000 debit), and materials quantity variance ($12,000 credit). This illustration presumes that all raw materials purchased are put into production. If this were not the case, then the price variances would be based on the amount purchased while the quantity variances would be based on output. There are two components to a direct materials variance, the direct materials price variance and the direct materials quantity variance, which both compare the actual price or amount used to the standard amount.

Direct Labor Variances

• Because the company uses 30,000 pounds of paper rather than the 28,000-pound standard, it loses an additional $20,700.
• 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.
• To compute the direct materials price variance, subtract the actual cost of direct materials ($297,000) from the actual quantity of direct materials at standard price ($310,500).
• Calculate the material price variance and the material quantity variance.
• You can check this video of mine for more examples of the material quantity variance.
• The same calculation is shown using the outcomes of the direct materials price and quantity variances.

An unfavorable outcome operating cash flow calculation means the actual costs related to materials were more than the expected (standard) costs. If the outcome is a favorable outcome, this means the actual costs related to materials are less than the expected (standard) costs. Another element this company and others must consider is a direct materials quantity variance. Use the following information to calculate direct material quantity variance. The unit produced are the equivalent units of production for the materials cost being analyzed.

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. Watch this video featuring a professor of accounting walking through the steps involved in calculating a material price variance and a material quantity variance to learn more. Of course, variances can be caused by production snafus, such as an excessive amount of scrap while setting up a production run, or perhaps damage caused by mishandling. It can even be caused by the purchasing department ordering materials that have an excessively low quality, so that more material is scrapped during the production process.

There are two components to a direct materials variance, the direct materials price variance and the direct materials quantity variance, which accrual accounting & prepayments both compare the actual price or amount used to the standard amount. Because the company uses 30,000 pounds of paper rather than the 28,000-pound standard, it loses an additional $20,700. The price and quantity variances are generally reported by decreasing income (if unfavorable debits) or increasing income (if favorable credits), although other outcomes are possible.

How to Calculate the Material Quantity Variance

Notice that this differs from the budgeted fixed overhead by $10,800, representing an unfavorable Fixed Overhead Volume Variance. Actual fixed factory overhead may show little variation from budget. For instance, rent is usually subject to a lease agreement that is relatively certain. Even though budget and actual numbers may differ little in the aggregate, the underlying fixed overhead variances are nevertheless worthy of close inspection. In other words, if the business has consumed fewer materials to produce a given level of output than expected, the material quantity variance is said to be favorable.

A good manager will want to explore the nature of variances relating to variable overhead. It is not sufficient to simply conclude that more or less was spent than intended. As with direct material and direct labor, it is possible that the prices paid for underlying components deviated from expectations (a variable overhead spending variance).