They train the employees to put two tablespoons of butter on each bag of popcorn, so total butter usage is based on the number of bags of popcorn sold. Therefore, if the theater sells 300 bags of popcorn with two tablespoons of butter on each, the total amount of butter that should be used is 600 tablespoons. Management can then compare the predicted use of 600 tablespoons of butter to the actual amount used. If the actual usage of butter was less than 600, customers may not be happy, because they may feel that they did not get enough butter.
If more than 600 tablespoons of butter were used, management would investigate to determine why. An inventory account (such as F.G. Inventory or Work-in-Process) is debited for $834; this is the standard cost of the direct materials component in the aprons manufactured in January 2022. Before we go on to explore direct labor variances, https://accounting-services.net/accountant-salary/ check your understanding of the direct materials efficiency variance. It is the difference between the standard cost of materials used for the actual output and the actual cost of materials used. Note 10.26 “Business in Action 10.2” illustrates just how important it is to track direct materials variances accurately.
Standard Costing Outline
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If the standard quantity allowed had exceeded the quantity actually used, the materials usage variance would have been favorable. To apply this method to the Band Book example, take a look at the next diagram. Direct materials actually cost $297,000, even though the standard cost of the direct materials is only $289,800. The actual quantity of direct materials at standard price equals $310,500.
Figure 10.4 “Direct Materials Variance Analysis for Jerry’s Ice Cream” shows how to calculate the materials price and quantity variances given the actual results and standards information. Review this figure carefully before moving on to the next section where these calculations are explained in detail. Direct material price variance (DM Price Variance) is defined as the difference between the expected and actual cost incurred on purchasing direct materials. It evaluates the extent to which the standard price has been over or under applied to different units of purchase.
For Jerry’s Ice Cream, the standard quantity of materials per unit of production is 2 pounds per unit. Thus the standard quantity (SQ) of 420,000 pounds is 2 pounds per unit × 210,000 units produced and sold. “It is the difference between the standard cost of direct materials specified for the output achieved Direct material total variance and the actual cost of direct materials used”. The same calculation is shown using the outcomes of the direct materials price and quantity variances. Connie’s Candy paid $2.00 per pound more for materials than expected and used 0.25 pounds more of materials than expected to make one box of candy.
Direct Materials Quantity Variance: Definition
From the accounting records, we know that the company purchased and used in production 6,800 BF of lumber to make 1,620 bodies. Based on a standard of four BF per body, we expected raw materials usage to be 6,480 (1,620 bodies x 4 BF per blank). For example, the unfavorable price variance at Jerry’s Ice Cream might have been a result of purchasing high-quality materials, which in turn led to less waste in production and a favorable quantity variance.
- ABC International expects to use five yards of thread in its production of a tent, but actually uses seven yards.
- A company can compute these materials variances and, from these calculations, can interpret the results and decide how to address these differences.
- Therefore, if the theater sells 300 bags of popcorn with two tablespoons of butter on each, the total amount of butter that should be used is 600 tablespoons.
- Standard costs are sometimes referred to as the “should be costs.” DenimWorks should be using 278 yards of denim to make 100 large aprons and 60 small aprons as shown in the following table.
- In our example, DenimWorks should have used 278 yards of material to make 100 large aprons and 60 small aprons.
The producer must be aware that the difference between what it expects to happen and what actually happens will affect all of the goods produced using these particular materials. Therefore, the sooner management is aware of a problem, the sooner they can fix it. For that reason, the material price variance is computed at the time of purchase and not when the material is used in production.
The purchase price variance is the difference between the standard and actual cost per unit of the direct materials purchased, multiplied by the standard number of units expected to be used in the production process. When a company makes a product and compares the actual materials cost to the standard materials cost, the result is the total direct materials cost variance. With either of these formulas, the actual quantity used refers to the actual amount of materials used at the actual production output. The standard quantity is the expected amount of materials used at the actual production output. If there is no difference between the actual quantity used and the standard quantity, the outcome will be zero, and no variance exists.
This year, Band Book made 1,000 cases of books, so the company should have used 28,000 pounds of paper, the total standard quantity (1,000 cases x 28 pounds per case). However, the company purchased 30,000 pounds of paper (the actual quantity), paying $9.90 per case (the actual price). The direct material cost variances including material price variance, material usage variance, material mix variance and material yield variance. The following chart depicts the divisions of Direct Material Cost Variances very clearly.
An unfavorable outcome means the actual costs related to materials were more than the expected (standard) costs. If the outcome is a favorable outcome, this means the actual costs related to materials are less than the expected (standard) costs. See direct material usage variance#Example and direct material price variance#Example for computations of both components. Whatever the cause of this unfavorable variance, Jerry’s Ice Cream will likely take action to improve the cost problem identified in the materials price variance analysis. This is why we use the term control phase of budgeting to describe variance analysis. Through variance analysis, companies are able to identify problem areas (material costs for Jerry’s) and consider alternatives to controlling costs in the future.
- The direct materials variances measure how efficient the company is at using materials as well as how effective it is at using materials.
- For the remainder of our explanation, we will use a common format for calculating variances.
- The direct material usage variance is the difference between the actual and expected unit quantity needed to manufacture a product.
- Clearly, this is unfavorable because the actual price was higher than the expected (budgeted) price.
- After removing 290 yards of materials, the balance in the Direct Materials Inventory account as of January 31 is $2,130 (710 yards x $3 standard cost per yard).