Standard Costing-Total Direct Material Variance

August 24th, 2006 Comments off
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TOTAL DIRECT MATERIAL VARIANCE.

·  It is the difference between the standard material cost for the actual production and the actual costs.

 

·  This variance consists of two part namely:

  ( Material Price Variance )

                   and

( Material Quantity Variance)

 

 

MATERIAL PRICE VARIANCE

  • The result of buying an actual quantity of materials at an ACTUAL price that is different from the STANDARD price.

 

Probable Causes Of Material Price Variance:

  • Market shortages or excesses (bad weather,etc);
  • Unpredictable fluctuation of market prices;
  • Material substitution;
  • Changes in supply chain -higher logistic costs;
  • Increases in duties like import duties,etc
  • Efficient or inefficient buying;
  • Differences in quality;
  • Cash discount taken or not taken and
  • Standard price set unrealistically.

Purpose of this variance:

  • Control the cost of direct materials;
  • Evaluate the performance of the purchasing department and
  • Measure the impact of prices increases or decreases on the company’s profit

 

 

Formula for Material PRICE Variance

 

Direct Material Price Variance

=

(Standard price less Actual price) x Actual Quantity purchased

 

Illustration Of Material PRICE Variance

 

Assuming the following data:

 

Standard price per kg $1.20

 

Actual price per kg $1.10

 

Actual quantity 6,000 kg

 

Question:

(a) Calculate the material price variance.

(b) Show the accounting entries

 

Solution:

(a) Material price variance

= (standard price-actual price) x actual quantity

=($1.20-$1.10) x 6,000 kg

= $ 600 (F)

 

(b) Accounting entries as follows:

Debit: Work In Progress $7,200

      Debit: Material Price Variance $600

      Credit: Creditor(6,000x 1.1) $6,600

 

MATERIAL QUANTITY VARIANCE

  • The result of buying an actual quantity of materials at an ACTUAL price that is different from the STANDARD price.

 

Probable Causes Of Material Quantity Variance:

  • Changes in product specification;
  • Higher defective materials;
  • Quality of materials;
  • Handling of materials;
  • Careless/reckless use by workers;
  • Use of substitutes;
  • Material mix;
  • Materials substitution;
  • Condition of machinery;
  • Machine settings operating at non-standard level;
  • Workmanship and
  • Breakages during handling of materials

Purpose of this variance:

  • Control the quantity of direct materials;
  • Evaluate the performance of the production (foreman, production manager) department and
  • Measure the impact of usage of materials on the company’s profit.

 

 

Formula for Material QUANTITY Variance

Direct Material QuantityVariance

=

(Standard quantity less Actual quantity) x Standard price

Illustration Of Material QUANTITY Variance

 

Assuming the following data:

 

Standard output 800 units

 

Actual output 900 units

 

Actual quantity used 4,500 kg

 

Standard material cost per unit 4 kg at $1.00 per kg =$4.00

 

Question:

(a) Calculate the material usage variance.

(b) Show the accounting entries

 

Solution:

(a)  Material quantity variance

= (standard quantity-actual quantity) x standard price

= (900 x 4 – 4,500kg) x $1

= $ 900 (A)

 

(b)  Accounting entries as follows:

Debit: Work In Progress (900×4 x$1) $3,600

      Debit: Material Quantity Variance $900

      Credit: Work in Progress(4,500x $1) $4,500

 

 

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Financial Accounting

 
 

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