Materials Price and Quantity Variances

Companies compare the actual cost with the standard cost. Two basic ways the actual cost of direct materials can deviate from standard cost is: (1) through price or (2) the quantity used in production. Therefore, the materials price variance and the materials quantity variance are typically calculated in determining whether or not the cost of direct materials is as expected or not. When standard costing is used in this way it is used for

.

The materials price variance compares the actual price paid per unit of direct materials to the standard price. That difference is multiplied by the actual quantity of materials.

Materials Price Variance = (Actual Price Actual Quantity) - (Standard Price Actual Quantity)

or

Materials Price Variance = Actual Quantity(Actual Price - Standard Price)

What is the "actual quantity"? For the materials price variance, we typically mean the actual quantity purchased. This aligns the materials price variance with the Purchasing Department, which has responsibility for the price of materials. (Note: Responsibility in accounting means that this department has the most information about the reason for any price difference and can explain it.)

For example, Filmont Company has the following standard cost card for prime costs:

Direct materials (3 yards @ $1.75 per yard)	$ 5.25
Direct labor (1.2 hours @ $18 per hour)	21.60

Last month, Filmont produced 420 units. Actual cost for direct materials was $2,240.10 for 1,310 yards of direct materials purchased.

Then,

Materials price variance = $2,240.10 - (1,310 $1.75) = $2,240.10 - $2,292.5 = $52.40 Favorable

or

Materials price variance = 1,310 ($1.71 - $1.75) = $52.40 Favorable

Notice that the second equation makes it easier to compare the actual price of $1.71 per yard ($2,240.10/1,310 yds) with the standard price of $1.75 per yard. Clearly, Filmont Company has paid $0.04 per yard less than standard. Multiplied by 1,310 yards purchased, the variance between actual price paid and standard price expected is $52.40.

A note about "Favorable" versus "Unfavorable." Variances are tagged as favorable or unfavorable. By doing this, we don't need to remember whether actual is subtracted from standard or vice versa. Instead, if a cost is higher than expected (standard) it is "unfavorable" and if it is lower than expected (standard) it is "favorable." However, favorable does not mean "good" and "unfavorable" does not mean "bad." For example, suppose that the standard quantity of active ingredient in a drug was 1,000 pounds and the actual amount used was 820. That is a "favorable" quantity variance (less used than standard) however, the drug is 18% below the advertised strength of active ingredient - a bad result.

Suppose that Filmont had paid $2,359.5 for 1,310 yards of material. The materials price variance would be (Do not round intermediate calcuations. Round your answer to the nearest cent.) $

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The materials quantity variance compares the amount of direct material actually used with the amount of material that should have been used at standard for actual production. Thus, we are moving away from direct materials purchased to the direct materials used in production. We can only figure the standard amount if we know: (1) the number of units actually produced and (2) the unit materials standard.

Materials usage variance = (Actual Quantity Standard price) - (Standard Quantity Standard Price)

or

Materials usage variance = Standard Price (Actual Quantity - Standard Quantity)

Standard quantity = Actual units produced unit standard direct materials

Recall that Filmont Company has the following standard cost card for prime costs:

Direct materials (3 yards @ $1.75 per yard)	$ 5.25
Direct labor (1.2 hours @ $18 per hour)	21.60

Last month, Filmont produced 420 units and used 1,320 yards of material.

What is the standard quantity of direct materials allowed for Filmont last month? yards

Materials usage variance = $1.75(1,320 - 1,260) = $105 Unfavorable

The materials usage variance is unfavorable because more yards were used (1,320) than the standard amount allowed for the 420 units actually produced or 1,260 yards at standard (420 units 3 yards).

Suppose 1,215 yards had been used. The materials usage variance would have been $

.

Filmont purchased 1,310 yards of material but actually used 1,320 yards. Where did the other 10 yards come from?