Variances of Direct Material

7/29/2019 Variances of Direct Material

1/17

Variances of Direct

Material


2/17

Agenda

Standard Direct Materials Cost Material Price Variance

Material Quantity Variance

Computing and Analyzing Direct Materials Variances


3/17

Standard Direct Materials Cost

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

Standard DirectMaterials Cost

=Direct MaterialsPrice Standard

xDirect Materials

Quantity Standard


4/17

Standard Direct Materials Cost (contd)

Direct materials price standard Careful estimate of the cost of a specific direct material in the next acc

period

Developed by purchasing agent or purchasing department

Takes into account

All possible price increases

Changes in available quantities

New sources of supply


5/17

Standard Direct Materials Cost (contd)

Direct materials quantity standard

Estimate of the amount of direct materials that willbe 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


6/17

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.


7/17

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: unfavorab

6. Actual quantity < standard quantity: favorable.


8/17

Computing and Analyzing Direct Materials Varia

To control operations, managers compute and analyze variafor

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, themore effective managers will be in controlling costs


9/17

Computing Direct Materials Variances

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


10/17

Computing Direct Materials Variances

Cambria Company makes leather bags. Each bag should use 4 feet of leather (standard quant

price of leather is $6.00 per foot. During August, the company purchased 760 feet of leather coand used the leather to produce 180 bags

costStandard

bag)perfeet4bags(180footper$6.00

$4,320720footper$6.00

costactualLess

4,484760footper$5.90

quantitystandardpriceStandard

quantityactualpriceActual

ncecost variamaterialsdirectTotal (U)164$

Actual cost > standard cos

This unfa(U)situa


11/17

Computing Direct Materials Variances (contd)

Total direct materials cost variance must be broken into twoto find the cause of the variance

Direct materials price variance

Direct materials quantity variance


12/17


Direct materials price variance

Difference between the standard price and theactual price per unit multiplied by the actualquantity purchased

Also called the direct materials spending or ratevariance

PriceActualPrice(StandardVariancePriceMaterialsDirect

QuantityActual

feet760$5.90)($6.00

Because the company paid less for direct materialsthan it expected, the variance is favorable (F)

(F)$76


13/17


Direct materials quantity variance

Difference between the standard quantity and theactual quantity used multiplied by the standardprice

Also called the direct materials efficiency or usagevariance

Qu(StandardPriceStandardVarianceQuantityMaterialsDirect

Quantity)ActualAllowed

76feet(720footper$6.00

Because the company used more for direct materialsthan it expected, the variance is unfavorable (U)

(U)$240


14/17


Test calculations of variances If correct, the net of the direct materials price variance and direct mate

quantity variance will equal the total direct materials cost variance

Direct materials price variance $ 76 (F)Direct materials quantity variance 240 (U)

Total direct materials cost variance $164 (U)


15/17

Diagram of Direct Materials Variance Analysis

Actual Direct Material

Purchased(APxAQ)$5.90 per ft. x 760 ft.= $4,484

Material Inventory

Purchased(SPxAQ)$6.00 per ft. x 760 ft.= $4,560

Work in progre

Inventory(SPxSQ)$5.90 per ft. x 7= $4,320

Direct MaterialPrice Varience(SP-AP)xAQ$.10 per ft. x 760 ft.= $76(F)

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

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

= $164(U)

DifferenceEquals

DifferenceEquals

DifferenceEquals


16/17

Analyzing and Correcting Direct Materials Varian

Company had been experiencing direct

materials price variances and quantityvariances 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


17/17

Discussion

Q. What is the direct materials price variance?

A. It is the difference between the standard price and the actual pricunit multiplied by the actual quantity purchased. It is also called materials spending or rate variance

PriceActualPrice(StandardVariancePriceMaterialsDirect

QuantityActual

Documents

Variances of Direct Material