8.2: Direct Materials Cost Variance
Actual and standard quantities and prices are given in the following table for direct materials to produce 1,000 units. Total actual and standard direct materials costs are calculated by multiplying quantity by price, and the results are shown in the last row of the first two columns.
|
Actual |
Standard |
Difference |
|||
|
Direct materials quantity in pounds |
8,400 |
8,600 |
(200) |
||
|
Direct materials price per pound |
$6.30 |
$6.00 |
$0.30 |
||
|
Total direct materials cost |
$52,920 |
- |
$51,600 |
= |
$1,320 |
The difference column shows that 200 fewer pounds were used than expected (favorable). It also shows that the actual price per pound was $0.30 higher than standard cost (unfavorable). The total actual cost is $1,320 higher than the standard cost. The direct materials used in production cost more than was anticipated, which is an unfavorable outcome.
Managers can better address this situation if they have a breakdown of the variances between quantity and price. Specifically, knowing the amount and direction of the difference for each can help them take targeted measures forimprovement.
The following table is expanded to include this additional information.
The difference in the quantity is multiplied by the standard price to determine that there was a $1,200 favorable direct materials quantity variance. This is offset by a larger unfavorable direct materials price variance of $2,520. The net direct materials cost variance is still $1,320 (unfavorable), but this additional analysis shows how the quantity and price differences contributed to the overall variance.
The following equations summarize the calculations for direct materials cost variance.
Direct materials quantity variance = (actual quantity – standard quantity) x standard price
Direct materials price variance = (actual price – standard price) x actual quantity
Total direct materials cost variance = direct materials quantity variance + direct materials price variance