Accounting: The Language of Business - Vol. 1 (Part 136)

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 Performance Evaluation Using Variances from Standard Costs (Part C)

by

Charles Lamson

Direct Materials Variances

What caused Western Rider Inc.'s unfavorable materials variance of $2,650? The direct materials standards from Exhibit 1 (from part 135 and reintroduced below) are as follows:

Price standard: $5.00 per square yard

Quantity standard: 1.5 square yards per pair of XL jeans

To determine the number of standard square yards of denim budgeted, multiply the actual production for June 2023 (5,000 pairs) for the quantity standard (1.5 square yards per pair). Then multiply the standard square yards by the standard price per square yard ($5) to determine the standard budgeted cost at the actual volume. The calculation is as follows:

EXHIBIT 2 Budget Performance Report

The calculation assumes that there is no change in the beginning and ending materials inventory. Thus, the amount of materials budgeted for production equals the amount purchased.

Assume that the actual total cost for denim used during June 2023 was as follows:

The total unfavorable cost variance of $2,650 ($40,150 - $37,500) results from an excess price per square yard of $0.50 and using 200 fewer square yards of denim. These two reasons can be reported as two separate variances, as shown in the next sections.

Direct Materials Price Variance

The direct materials price variance is the difference between the actual price per unit ($5.50) and the standard price per unit ($5), multiplied by the actual quantity used (7,300 square yards). If the actual price per unit exceeds the standard price per unit, the variance is unfavorable, as shown for Western Rider Inc. If the actual price per unit is less than the standard price per unit, the variance is favorable. The calculation for Western Rider Inc. is as follows:

Direct Materials Quantity Variance

The direct materials quantity variance is the difference between the actual quantity used (7,300 square yards) and the standard quantity at actual production (7,500 square yards), multiplied by the actual standard price per unit ($5). If the actual quantity of materials used exceeds the standard quantity budgeted, the variance is unfavorable. If the actual quantity of materials used is less than the standard quantity, the variance is favorable, as shown for Western Rider Inc.:

Direct Materials Variance Relationships

The direct materials variances can be illustrated by making the three calculations shown in Exhibit 3.

EXHIBIT 3 Direct Materials Variance Relationships

Reporting Direct Materials Variances

The direct materials quantity variance should be reported to the proper operating management level for corrective action. For example, an unfavorable quantity variance might have been caused by manufacturing equipment that has not been properly maintenanced or operated. However, unfavorable materials quantity variances are not always caused by operating departments. For example, the excess materials usage may be caused by purchasing inferior raw materials. In this case, the Purchasing Department should be held responsible for the variance.

The materials price variance should normally be reported to the purchasing department, which may or may not be able to control this variance. If materials of the same quality could have been purchased from another supplier at the standard price, the variance was controllable. On the other hand, if the variance resulted from a market-wide price increase, the variance may not be controllable. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 921-923*

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