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8 2 Compute and Evaluate Materials Variances Principles of Accounting, Volume 2: Managerial Accounting

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. Ignore how much you actually paid for raw materials; we’re just trying to quantify the actual vs. expected quantity. To evaluate the price difference, you’re looking for a different accounting formula called the direct material price variance. 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.

Note that both approaches—the direct materials quantity variance calculation and the alternative calculation—yield the same result. The standard quantity of 420,000 pounds is the quantity of materials allowed given actual production. 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. 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.

How to Calculate Materials Quantity Variance

The direct materials variances measure how efficient the company is at using materials as well as how effective it is at using materials. There are two components to a direct materials variance, the direct materials price variance and the direct materials quantity variance, which both compare the actual price or amount used to the standard amount. 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. Generally, the production managers are considered responsible for direct materials quantity variance because they are the persons responsible for keeping a check on excessive usage of production inputs.

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. 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. Finish the materials quantity variance calculation by multiplying the difference of the standard and actual quantities by the standard cost. The combination of the two variances can produce one overall total direct materials cost variance.

1. It can even be caused by the purchasing department ordering materials that have an excessively low quality, so that more material is scrapped during the production process.
2. If that doesn’t help you understand what went wrong to cause a variance, stop here.
3. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
4. The normal wastage and inefficiencies are taken into account while setting direct materials price and quantity standards.

As a result of this unfavorable outcome information, the company may consider retraining workers to reduce waste or change their production process to decrease materials needs per box. Like direct materials price variance, this variance may be favorable or unfavorable. 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 relationship between bond prices and interest rates is known as favorable direct materials quantity variance. On the other hand, if workers use the quantity that is more than the quantity allowed by standards, the variance is known as unfavorable direct materials quantity variance. These thin margins are the reason auto suppliers examine direct materials variances so carefully. Any unexpected increase in steel prices will likely cause significant unfavorable materials price variances, which will lead to lower profits.

Causes of unfavorable direct materials quantity variance

Businesses that use the standard costing system to value inventory need to estimate standard prices and quantities for all direct materials. You’ll use those figures to track the manufacturing process in your accounting software. Direct materials move from raw materials to work in process (WIP) to finished goods as they’re transformed into saleable products.

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The normal wastage and inefficiencies are taken into account while setting direct materials price and quantity standards. Variances are calculated and reported at regular intervals to ensure the quick remedial actions against any unfavorable occurrence. Don’t immediately blame inferior raw materials or your factory workers for an unfavorable materials quantity variance. When you calculate the variance, you’re comparing actual material usage to what you expected. It could be that the expectation you created in the product development process is askew.

In the standard costing system, material costs are posted at the standard price. The actual quantity (1,200 sheets) of plastic is removed from the raw materials inventory at the standard price (4.00) giving a credit entry of 4,800 posted to the account. The standard quantity (1,000) which should have been used in production is transferred to work in process inventory at the standard price (4.00), giving a total debit entry of 4,000. The difference between the two postings is the variance of -800, which is posted to the direct materials variance account as a debit representing the unfavorable variance. In this case, the actual quantity of materials used is 0.50 how to use the excel timevalue function pounds, the standard price per unit of materials is $7.00, and the standard quantity used is 0.25 pounds. This is an unfavorable outcome because the actual quantity of materials used was more than the standard quantity expected at the actual production output level.

If that doesn’t help you understand what went wrong to cause a variance, stop here. Find the materials quantity variance by multiplying the standard cost by the difference between the standard and actual quantities. Watch this video featuring a professor of accounting walking through the steps involved in calculating a material price variance and a material quantity variance to learn more. You’re most likely to run into an unfavorable materials quantity variance because of one of the following issues.