Question
Gauging the Favorableness of Variances When variances occur, they are described as being either favorable or unfavorable. When actual activity consumes more time or money
Gauging the Favorableness of Variances
When variances occur, they are described as being either favorable or unfavorable. When actual activity consumes more time or money than initially planned, an unfavorable variance exists. However, when actual activity consumes less time or money than initially planned, a favorable variance exists. Note that the terms favorable and unfavorable are used, rather than saying that a variance is good or bad, because until the cause of a variance is discovered, it is not clear whether a variance is either good or bad.
Note: Use the minus sign to indicate negative values (when the budgeted amount is greater than the actual).
If a company calculates that the actual cost for materials used was $4,200,000, and the amount budgeted for those materials was $3,800,000, the actual cost for materials used less the budgeted cost for materials used is $. This tells you that the actual cost at actual materials used is greater than the budgeted cost at actual hours worked.
What type of variance is this? Unfavorable direct materials price variance
If a company calculates that the budgeted cost for actual materials used is $100,000, and the budgeted cost at the budgeted amount of materials to have been used is $160,000, the budgeted cost at actual materials used less the budgeted cost at budgeted materials to have been used is $. This tells you that the actual materials used at budgeted cost is less than the budgeted materials used at budgeted cost.
What type of variance is this? Favorable direct materials quantity variance
Feedback
Subtract the budgeted amount from the actual amount to get the sign correct. Note that if an amount spent or quantity used for materials goes down, then profits for the company go up, so a negative direct materials cost variance is favorable.
Likewise, an increase in the amount spent or quantity used would decrease profits, so this would be an unfavorable variance.
Standard Materials Cost
The controller at your shoemaking company has determined that under normal conditions, you will spend $8.40 per unit of materials, and it will take 2.6 units of material per pair of shoes. Given this information, calculate the standard cost of materials per pair of shoes. If require, round the standard cost per pair of shoes to the nearest cent.
Manufacturing Costs | Standard Price per Unit of Material | x | Standard Materials per Pair | = | Standard Cost per Pair |
Direct Materials | $ per unit | units | $ |
Feedback
Use the standard price and standard materials values shown to compute the standard cost per pair.
Actual Materials Cost
During March, your shoemaking company incurred actual direct materials costs of $62,211 for 6,990 units of direct materials in the production of 2,175 pairs of shoes. Given this information, calculate the actual cost of materials per unit. If require, round the actual cost of materials per unit to the nearest cent.
Manufacturing Costs | Actual Total Cost of Materials | / | Actual Materials Used | = | Actual Cost per Unit |
Direct Materials | $ | units | $ |
Feedback
Use the actual total cost of materials and actual materials used as shown to compute the actual cost per unit of materials.
APPLY THE CONCEPTS: Conduct the Direct Materials Cost Variance Analysis
Complete the following graphic to compute the direct materials price variance, the direct materials quantity variance, and the total direct materials cost variance for your shoe-making business. When required, enter the rates as dollars and cents. If required, use the minus sign to indicate a negative value.
Illustrated Example: Calculating Direct Materials Cost Variance |
Actual Cost | Standard Cost | |||||||||
Actual Materials | x | Actual Rate | Actual Materials | x | Standard Rate | Standard Materials | x | Standard Rate | ||
x | $ | x | $ | x | $ | |||||
= | $ | = | $ | = | $ | |||||
Direct Materials Price Variance | Direct Materials Quantity Variance | |||||||||
$ | - | $ | $ | - | $ | |||||
= | $ | U | = | $ | U | |||||
Total Direct Materials Cost Variance | ||||||||||
$ | - | $ | ||||||||
= | $ | U |
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