This measurement is derived as part of a standard costing system, and is intended to assist management in controlling costs. The direct material variance is comprised of two other variances, which are noted below. It is customary to calculate and report these two variances separately, so that management can determine if variances are caused by purchasing issues or manufacturing problems. Direct material price variance (DM Price Variance) is defined as the difference between the expected and actual cost incurred on purchasing direct materials.

1. Recall from Figure 10.1 “Standard Costs at Jerry’s Ice Cream” that the direct materials standard price for Jerry’s is $1 per pound, and the standard quantity of direct materials is 2 pounds per unit.
2. The material price variance in this example is favorable because the company was able to get the materials at a lower cost compared to the budget.
3. This setup explains the unfavorable total direct materials variance of $7,200 — the company gains $13,500 by paying less for direct materials, but loses $20,700 by using more direct materials.
4. For
   auto suppliers that use hundreds of tons of steel each year, this
   had the unexpected effect of increasing expenses and reducing
   profits.

Our purchasing department was able to find materials for less than our standard, saving us a significant amount of money, which in turn improves the bottom line, which means this is a favorable variance. We could interpret the negative number as “below expectations” which is possibly a good thing when it comes to cost. However, it is also possible that we gained those cost reductions by buying lesser quality raw materials which could hurt us in the long run. The following equations summarize the calculations for direct materials cost variance. The terms favorable and unfavorable relate to
the impact the variance has on budgeted operating profit.

The total budget for raw materials is $900,000 ($2.50 per raw material). If the total actual cost is higher than the total standard cost, the variance is unfavorable since the company paid more than what it expected to pay. If the total actual cost incurred is less than the total standard cost, the variance is favorable. 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.

Material Price Variance Formula

A favorable outcome means you used fewer materials than anticipated, to make the actual number of production units. If, however, the actual quantity of materials used is greater than the standard quantity used at the actual production output level, the variance will be unfavorable. An unfavorable outcome means you used more materials than anticipated to make the actual number of production units.

Note 10.26 “Business in Action 10.2” illustrates just how
important it is to track direct materials variances accurately. Note 10.26 “Business in Action 10.2” illustrates just how important it is to track direct materials variances accurately. The material price variance in this example is favorable because the company was able to get the materials at a lower cost compared to the budget. The direct material price variance is also known as direct material rate variance and direct material spending variance.

Question 1

Actual cost of material is the amount the company paid to supplier to get input for the prodution. Standard cost is the amount the company expect to pay to get the same quantity of material. The difference of actual and standard cost raise due to the price change, while the material quantity remains the same.

How is the direct material quantity variance calculated?

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 direct materials used in production cost more than was anticipated, which is an unfavorable outcome. With either of these formulas, the actual quantity purchased refers to the actual amount of materials bought during the period.

But the actual quantity used may be more or less than the quantity allowed by standards. The reasons of using more or less quantity of direct materials than what has been allowed by standards are discussed on direct materials quantity https://accounting-services.net/ variance page. 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.

What Causes a Direct Material Price Variance?

As you calculate variances, you should think through the variance to confirm whether it is favorable or unfavorable. For example, the materials price variance calculation presented previously shows the actual price paid for materials was $1.20 per pound and the standard price was $1. Clearly, this is unfavorable because the actual price was higher than the expected (budgeted) price. Figure 8.3 shows the connection between the direct materials price variance and direct materials quantity variance to total direct materials cost variance.

The direct materials quantity variance of Blue Sky Company, as calculated above, is favorable because the actual quantity of materials used is less than the standard quantity allowed. Direct materials quantity variance is a part of the overall materials cost variance that occurs due to the difference between the actual quantity of direct materials used and the standard quantity allowed for the output. In other words, when actual quantity of materials used deviates from the standard quantity of materials allowed to manufacture a certain number of units, materials quantity variance occurs.

For that reason, the material price variance is computed at the time of purchase and not when the material is used in production. A favorable materials quantity variance indicates savings in the use of direct materials. An unfavorable variance, on the other hand, indicates that the amount of materials used exceeds the standard requirement. For Boulevard Blanks, let’s assume that the standard cost of lumber is set at $6 per board foot and the standard quantity for each blank is four board feet.

For example, the materials price variance
calculation presented previously shows the actual price paid for
materials was $1.20 per pound and the standard price was $1. Clearly, this is unfavorable because the actual price was higher
than the expected (budgeted) price. In this case, the actual price per unit of materials is $9.00, the standard price per unit of materials is $7.00, and the actual quantity purchased is 20 pounds. This is an unfavorable outcome because the actual price for materials was more than the standard price.

As you’ve learned, direct materials are those materials used in the production of goods that are easily traceable and are a major component of the product. The amount of materials used and the price paid for those materials may differ from the standard costs determined at the beginning of a period. A company can compute these materials variances and, from these calculations, can interpret the results and decide how to address these differences. According to above computations, the company requires 4.00 pounds of A grade plastic to manufacture one computer case.

If a company’s actual quantity used exceeds the standard allowed, then the direct materials quantity variance will be unfavorable. This means that the company has utilized more materials than expected and may have paid extra in materials cost. The variance is calculated using the direct materials price variance formula which takes the difference between the standard material unit price and the actual material unit price, and multiplies this by the quantity of units. The quantity of units will either be the quantity used in production or the quantity purchased, depending on the point at which the variance is to be calculated.