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Variances of Direct
Material
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Agenda
Standard Direct Materials Cost Material Price Variance
Material Quantity Variance
Computing and Analyzing Direct Materials Variances
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Standard Direct Materials Cost
is found by multiplying the price standard for direct materthe quantity standard for direct materials
Standard DirectMaterials Cost
=Direct MaterialsPrice Standard
xDirect Materials
Quantity Standard
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Standard Direct Materials Cost (contd)
Direct materials price standard Careful estimate of the cost of a specific direct material in the next acc
period
Developed by purchasing agent or purchasing department
Takes into account
All possible price increases
Changes in available quantities
New sources of supply
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Standard Direct Materials Cost (contd)
Direct materials quantity standard
Estimate of the amount of direct materials that willbe used in the accounting period Includes scrap and waste
Influenced by Product engineering specifications Quality of direct materials Age and productivity of machinery Quality and experience of work force
Established and monitored by Production managers Management accountants Others
Engineers, purchasing agents, machine operators
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Material Price Variance
1. Material price variance:(AP SP) x AQp
2. (AP) = actual price per unit of material.
3. (SP) = standard price per unit of direct material.
3. (AQp) = actual quantity of material purchased.
4. Actual price > standard price: unfavorable.
5. Actual price < standard price: favorable.
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Material Quantity Variance
1. Material quantity variance: (AQu SQ)SP
2. (AQu) = actual quantity of material used.
3. (SQ) = standard quantity of material allowed.
4. (SP) = standard price of material.
5. Actual quantity > standard quantity: unfavorab
6. Actual quantity < standard quantity: favorable.
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Computing and Analyzing Direct Materials Varia
To control operations, managers compute and analyze variafor
Whole cost categories
Such as total direct materials costs
Elements of those categories
Such as the price and quantity of each direct material
The more detailed the analysis of a variance is, themore effective managers will be in controlling costs
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Computing Direct Materials Variances
Total direct materials cost variance Difference between the standard cost and actual cost of direct materia
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Computing Direct Materials Variances
Cambria Company makes leather bags. Each bag should use 4 feet of leather (standard quant
price of leather is $6.00 per foot. During August, the company purchased 760 feet of leather coand used the leather to produce 180 bags
costStandard
bag)perfeet4bags(180footper$6.00
$4,320720footper$6.00
costactualLess
4,484760footper$5.90
quantitystandardpriceStandard
quantityactualpriceActual
ncecost variamaterialsdirectTotal (U)164$
Actual cost > standard cos
This unfa(U)situa
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Computing Direct Materials Variances (contd)
Total direct materials cost variance must be broken into twoto find the cause of the variance
Direct materials price variance
Direct materials quantity variance
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Computing Direct Materials Variances (contd)
Direct materials price variance
Difference between the standard price and theactual price per unit multiplied by the actualquantity purchased
Also called the direct materials spending or ratevariance
PriceActualPrice(StandardVariancePriceMaterialsDirect
QuantityActual
feet760$5.90)($6.00
Because the company paid less for direct materialsthan it expected, the variance is favorable (F)
(F)$76
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Computing Direct Materials Variances (contd)
Direct materials quantity variance
Difference between the standard quantity and theactual quantity used multiplied by the standardprice
Also called the direct materials efficiency or usagevariance
Qu(StandardPriceStandardVarianceQuantityMaterialsDirect
Quantity)ActualAllowed
76feet(720footper$6.00
Because the company used more for direct materialsthan it expected, the variance is unfavorable (U)
(U)$240
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Computing Direct Materials Variances (contd)
Test calculations of variances If correct, the net of the direct materials price variance and direct mate
quantity variance will equal the total direct materials cost variance
Direct materials price variance $ 76 (F)Direct materials quantity variance 240 (U)
Total direct materials cost variance $164 (U)
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Diagram of Direct Materials Variance Analysis
Actual Direct Material
Purchased(APxAQ)$5.90 per ft. x 760 ft.= $4,484
Material Inventory
Purchased(SPxAQ)$6.00 per ft. x 760 ft.= $4,560
Work in progre
Inventory(SPxSQ)$5.90 per ft. x 7= $4,320
Direct MaterialPrice Varience(SP-AP)xAQ$.10 per ft. x 760 ft.= $76(F)
Direct MaterialQuantity Varience(SQ-AQ)xSP$6.00 per ft. x 40 ft.= $240(U)
Total Direct MaterialCost Varience(Net of Direct material price varience and direct materials quantity varience)$76(F)-$240(U)
= $164(U)
DifferenceEquals
DifferenceEquals
DifferenceEquals
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Analyzing and Correcting Direct Materials Varian
Company had been experiencing direct
materials price variances and quantityvariances for some time
For three months, managers tracked Purchasing activities
Discovered that the purchasing agent had purchased,without authorization, a lower grade of leather at a reduced
price After analysis, engineers determined the lower grade of leather
was not appropriate
Scrap and rework Discovered that inferior leather was causing the
unfavorable quantity variance
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Discussion
Q. What is the direct materials price variance?
A. It is the difference between the standard price and the actual pricunit multiplied by the actual quantity purchased. It is also called materials spending or rate variance
PriceActualPrice(StandardVariancePriceMaterialsDirect
QuantityActual
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