In a standard costing system, the costs of production, inventories, and the cost of goods sold are initially recorded using the standard costs. In the case of direct materials, it means the standard quantity of direct materials that should have been used to make the good output. If the manufacturer uses more direct materials than the standard quantity of materials for the products actually manufactured, the company will have an unfavorable direct materials usage variance.
The standard cost is the amount your business expected to pay for each unit of raw material. We’ll discuss this in detail later, but companies that use the standard costing system to value their inventory correct their inventory account balances when are expenses credited with the materials quantity variance. The concept of material usage variance refers to the difference between the actual usage of materials in the production process versus the standard usage based on the amount of output produced.
Calculates the difference between the standard cost and the actual cost for the actual quantity of material used or purchased. Material usage variance must be calculated using the standard price rather than the actual price. An unfavorable (adverse) variance indicates that a greater amount of material was used than was necessary if the actual quantity was greater than the standard quantity. The variance is favorable if the actual quantity of material used is less than the standard quantity, indicating that less material was used than anticipated. Always make sure you mention such interdependencies when discussing variances in exam questions. For a full appreciation of the impact of the mix change, the sales variances would also have to be considered, although it is likely to take time for sales volumes to be affected.
What is the Direct Material Usage Variance?
This is an unfavorable outcome because the actual price for materials was more than the standard price. As a result of this unfavorable outcome information, the company may consider using cheaper materials, changing suppliers, or increasing prices to cover costs. Figure 8.3 shows the connection between the direct materials price variance and direct materials quantity variance to total direct materials cost variance.
- Favorable when the actual material used is less than standard while unfavorable is the other way around.
- Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
- To save time in the exam, copy down the mix variance table – but take care to make sure it is then set up correctly as there are some differences.
- If workers manufacture a certain number of units using a quantity of materials that is less than the quantity allowed by standards for that number of units, the variance is known as favorable direct materials quantity variance.
- In a larger manufacturing operation, it is best to calculate this variance at the individual product level, since it reveals little actionable information at an aggregate level.
- Angro Limited, a single product American company, employs a proper standard costing system.
If the actual quantity of materials used is less than the standard quantity used at the actual production output level, the variance will be a favorable variance. 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. In this case, the actual price per unit of materials is $6.00, the standard price per unit of materials is $7.00, and the actual quantity purchased is 20 pounds.
common causes of materials quantity variance
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.
What is material cost variance and material usage variance?
A material quantity variance points to a lack of efficiency during the manufacturing process. If it’s not because of defective materials, look into how your factory workers are trained. Factory workers who receive insufficient training won’t work at maximum efficiency, wasting more material than is necessary for production. Material usage variance is calculated using the quantity of material utilized during the period rather than the quantity purchased. Materials usage variances need to be identified and analyzed regularly to identify their root causes, such as material quality, production efficiency, or even inaccurate planning. In order to reduce costs and increase profitability, managers need to understand these variances in order to improve the production process and minimize waste.
In other words, it is the difference between how much material should have been used and how much material was used, valued at standard cost. The variance is most commonly used in a production environment, but can also be used in a services business where hours worked can be compared to a budgeted level. Fortunately, consequences such as these will occur in the same period as the mix variance and are therefore more likely to be identified and the problem resolved.
We will use this past exam question to demonstrate the calculation of the variances and analysis of performance. Standard costing and basic variance calculations should be familiar from earlier studies. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Fresh PLC purchased 10,000 KG of sodium fluoride at the cost of $20,000 ($2 per KG) out of which it utilized 9,000 KG during the period. Variances direct management’s attention to areas where the company’s operations are deviating from the company’s budgets and profit plans.
Formulas to Calculate Material Cost Variance and Material Price Variance
The materials quantity variance is one of several cost accounting metrics that manufacturers review to measure manufacturing efficiency. Keeping an eye on variances helps manufacturers identify and remedy issues as they crop up. Since companies have multiple inventory turnovers each year, small balances in the variance accounts (for whatever reason) are generally combined with the standard amount of the cost of goods sold. The same calculation is shown using the outcomes of the direct materials price and quantity variances.
In general, it can be assumed in exam questions that the production manager is responsible for the mix of input materials used. It can be tempting for production managers to change the product mix in order to make savings; these savings may lead to greater bonuses for them at the end of the day. However, if the quality of the product is adversely affected, this is damaging to the reputation of the business and hence its long‑term survival prospects.
By showing the total materials variance as the sum of the two components, management can better analyze the two variances and enhance decision-making. Also, do not forget the material price variance in your analysis as this may provide additional information. This is calculated as the difference between the actual quantity of material valued at the actual cost and the actual quantity of material valued at the standard cost. The material quantity variance is divided into a material mix variance and a material yield variance. We compute the material mix variance by holding the total input units constant at their actual amount. 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.
A favorable outcome means you spent less on the purchase of materials than you anticipated. If, however, the actual price paid per unit of material is greater than the standard price per unit, the variance will be unfavorable. An unfavorable outcome means you spent more on the purchase of materials than you anticipated.
MUV is the deviation of the ratio of the actual quantity of materials consumed for the actual output from the standard quantity of materials to be consumed for the actual output. The deviation is of this quantity is to be multiplied by the standard price to convert the quantity into monetary value. MUV is favorable when the actual quantity of direct materials used is less than the total standard quantity allowed for the actual output. In our example, DenimWorks should have used 278 yards of material to make 100 large aprons and 60 small aprons. Because the company actually used 290 yards of denim, we say that DenimWorks did not operate efficiently. When we multiply the additional 12 yards times the standard cost of $3 per yard, the result is an unfavorable direct materials usage variance of $36.