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 what should 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 lower-quality materials than planned	Yes
2. Using higher-quality materials than planned	Yes
3. Unexpected quantity discounts	Yes

Direct Materials Quantity Variance

This type of variance is concerned with the difference between materials used and materials that should have 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 higher-than-normal product defect rate	Yes
2. Using more materials in the actual production than planned	Yes
3. Using less materials in the actual production than planned	Yes

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 $4,500,000, and the amount budgeted for those materials was $3,700,000, 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 the budgeted cost at actual hours worked.

What type of variance is this?

If a company calculates that the budgeted cost for actual materials used is $120,000, and the budgeted cost at the budgeted amount of materials to have been used is $120,000, 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 the budgeted materials used at budgeted cost.

What type of variance is this?

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		$

Actual Materials Cost

During August, 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		$

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
		$	-	$		$	-	$
			=	$			=	$
			Total Direct Materials Cost Variance
				$	-	$
					=	$