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 fora specic 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 what ShDLlCl have been paid for 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 lowerquality materials than planned k V! 2. Using higherquality materials than planned k V! 3. Unexpected quantity discounts k V! Direct Materials Quantity Variance This type of variance is concerned with the difference between materials used and materials that should rave been used for 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 higherthannormal product defect rate k V! 2. Using more materials in the actual production than planned k V! 3. Using less materials in the actual production than planned k V! Feedback 7 Check My Work For the pride variances, determine whether each item will impact the total pride paid for the materials. For usage variances, determine whether each item will impact the quantity of maten'als 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]. Ifa company calculates that the actual cost for materials used was $3,000,000, and the amount budgeted for those materials was $5,000,000, the actual cost for materials used less the budgeted cost for materials used is 'e -2,DDD,000 v/ . This tells you that the actual cost at actual materials used is less than ' J the budgeted cost at actual hours worked. What type of variance is this? Favorable direct materials Brice variance v J If a company calculates that the budgeted cost for actual materials used is $180,000, and the budgeted cost at the budgeted amount of materials to have been used is $190,000, the budgeted cost at actual materials used less the budgeted cost at budgeted materials to have been used is _ 1/ . This tells you that the actual materials used at budgeted cost is less than v J the budgeted materials used at budgeted cost. What type of variance is this? Favorable direct materials quantity variance 7 if Feedback ' Check My Work Subtract the budgeted amount from the actual amount to get the sign correct. Note that if an amount spent or quantity.r used for materials goes down. then prots for the company go gp: so a negative direct materials cost van'a nce is favorable. Likewise, an increase in the amount spent or quantity used would decrease prots, so this I.vould be an unfavorable variance. Standard Materials Cost The controller at your shoemaking company has determined that under normal conditions, you will spend $8.50 per unit of materials, and it will take 2.8 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. Standard Price Standard Materials Standard lCost Manufacturing Costs per Unit of Material x per Pair = per Pair _ Direct Materials Feedback ' Check My Work Use the standard price and standard materials values shown to compute the standard cost per pair. Actual [\\'ateria 5 Cost During April, your shoemaking companyr incurred actual direct materials costs of $65,610 for 1290 units of direct materials in the production of 2,200 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. Actual Total Cost Actual Materials Actual Cost Manufacturing Costs of Materials I Used = per Unit Direct Materials -. 65,610 J 7,290 1/ units 5- J Feedback ' Check My Work 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 lCost Variance 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.r 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 1 l Direct Materials Price Variance Direct Materials Quantity.r Variance 5: a: E Total Direct Materials Cost Variance S Feedback " Check My Work Pull down each of the values from the sections above and track the values down following the arrows. To determine standard materials used, multiply the number otshoes actually completed times the standard quantity,r of materials that should be used per shoe. Feedback "' Check My Work Partially correct