Mastery Problem: Direct Materials Cost Variance

Direct Materials Cost Variance Analysis

Variance analysis is used as a performance evaluation measure for responsible managers. Direct materials cost variance occurs when the cost of materials or the amount of materials used for actual output deviates from what was initially planned by company management for a given period of time or for a specific amount of production. Direct materials cost variance analysis is conducted by comparing the standard materials cost for production with the actual materials cost incurred for the actual production quantity of the product.

There are two parts to direct materials cost variance analysis. The first is a comparison of the standard cost per unit of materials with the actual cost per unit of materials, which results in the determination of the direct materials price variance. The second is a comparison of the standard quantity of use of units of materials with the actual quantity of use of units of materials for the actual production completed, which results in the determination of the direct materials quantity variance.

Direct Materials Price Variance

This type of variance is concerned with the difference between what was paid for materials and whatshould have been paidfor materials used in production.

Which of the following activities are possible causes of direct materials price variance? Select "Yes" for all that apply.

1. Using lower-quality materials than planned	YesNoYes
2. Using higher-quality materials than planned	YesNoYes
3. Unexpected quantity discounts	YesNoYes

Direct Materials Quantity Variance

This type of variance is concerned with the difference between materials used and materials thatshould have been usedfor the actual output.

Which of the following activities are possible causes of direct materials quantity variance? Select "Yes" for all that apply.

1. Having a higher-than-normal product defect rate	YesNoYes
2. Using more materials in the actual production than planned	YesNoYes
3. Using less materials in the actual production than planned	YesNoYes

Feedback

For the price variances, determine whether each item will impact the total price paid for the materials.

For usage variances, determine whether each item will impact the quantity of materials used.

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 $3,500,000, and the amount budgeted for those materials was $4,300,000, the actual cost for materials used less the budgeted cost for materials used is $fill in the blank 8ae419025037fba_1. This tells you that the actual cost at actual materials used is

equal toless thangreater thanless than

the budgeted cost at actual hours worked.

What type of variance is this?

No varianceFavorable direct materials price varianceUnfavorable direct materials price varianceFavorable direct materials price variance

If a company calculates that the budgeted cost for actual materials used is $190,000, and the budgeted cost at the budgeted amount of materials to have been used is $150,000, the budgeted cost at actual materials used less the budgeted cost at budgeted materials to have been used is $fill in the blank 8ae419025037fba_4. This tells you that the actual materials used at budgeted cost is

greater thanequal toless thangreater than

the budgeted materials used at budgeted cost.

What type of variance is this?

Unfavorable direct materials quantity varianceNo varianceFavorable direct materials quantity varianceUnfavorable 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 goesdown, then profits for the company goup, so a negative direct materials cost variance is favorable.

Likewise, an increase in the amount spent or quantity used woulddecreaseprofits, 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	$fill in the blank 47dd0ffc405cfab_1 per unit		fill in the blank 47dd0ffc405cfab_2 units		$fill in the blank 47dd0ffc405cfab_3

Feedback

Use the standard price and standard materials values shown to compute the standard cost per pair.

Actual Materials Cost

During May, 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	$fill in the blank 7a27d202afd3022_1		fill in the blank 7a27d202afd3022_2 units		$fill in the blank 7a27d202afd3022_3

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
fill in the blank 076ed1f87f9ffd7_1	x	$fill in the blank 076ed1f87f9ffd7_2		fill in the blank 076ed1f87f9ffd7_3	x	$fill in the blank 076ed1f87f9ffd7_4		fill in the blank 076ed1f87f9ffd7_5	x	$fill in the blank 076ed1f87f9ffd7_6
	=	$fill in the blank 076ed1f87f9ffd7_7			=	$fill in the blank 076ed1f87f9ffd7_8			=	$fill in the blank 076ed1f87f9ffd7_9
		Direct Materials Price Variance	Direct Materials Quantity Variance
$fill in the blank 076ed1f87f9ffd7_10	-	$fill in the blank 076ed1f87f9ffd7_11		$fill in the blank 076ed1f87f9ffd7_12	-	$fill in the blank 076ed1f87f9ffd7_13
	=	$fill in the blank 076ed1f87f9ffd7_14	UFNo varianceU	=	$fill in the blank 076ed1f87f9ffd7_16	UFNo varianceU
	Total Direct Materials Cost Variance
		$fill in the blank 076ed1f87f9ffd7_18	-	$fill in the blank 076ed1f87f9ffd7_19
			=	$fill in the blank 076ed1f87f9ffd7_20	UFNo varianceU