Standard Costing-Total Direct Material Variance

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