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. 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. Don’t immediately blame inferior raw materials or your factory workers for an unfavorable materials quantity variance.

But, a closer look reveals that overhead spending was quite favorable, while overhead efficiency was not so good. During a period, the Teddy Bear Company used 15,000 kilograms of stuffing material to produce 9000 teddy bears. The company had paid an average price of $1.5 per kilogram of stuffing material.

1. The main differences to note is in cell E14 which is now the sum of cells B14 to D14 and the heading for Actual quantity in standard mix is now on the top row of the table in cell A13.
2. For example, if a standard quantity of 10 pounds of iron is needed to construct a widget, but 11 pounds are actually used, then there is a quantity variance of one pound of iron.
3. Accountingo.org aims to provide the best accounting and finance education for students, professionals, teachers, and business owners.
4. During the month of December 2022, its workers used 3,750 feet of timber to finish 1,500 office chairs.
5. Calculate direct materials quantity variance and also indicate whether it is favorable or unfavorable.
6. The first step in the calculation is to figure out how much stuffing material should be used to manufacture 9000 teddy bears (standard quantity).

As a result of this favorable outcome information, the company may consider continuing operations as they exist, or could change future budget projections to reflect higher profit margins, among other things. 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 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. As is the case when analyzing other variances, the direct material price variance needs to be assessed in the context of other relevant variances and factors, such as direct material price variance and direct labor variances.

Variable Factory Overhead Variances

Green Co. established a benchmark standard of utilizing 10 units for every product. However, during a recent production cycle, the actual material consumption per unit amounted to 9. This variance from the standard quantity prompted an exploration of the material quantity variance. As an example of the quantity variance, ABC International uses 5,000 pounds of steel during a month of production, when the bill of materials for the items produced indicate that only 4,200 pounds should have been used. Since the standard price of steel is $20 per pound, ABC can value this variance at $16,000. A number of parties may be held responsible for an unfavorable quantity variance (or take credit for a favorable variance!).

How is direct material usage variance calculated in a multi-product company?

Following is an illustration showing the flow of fixed costs into the Factory Overhead account, and on to Work in Process and the related variances. In other words, if the business has consumed fewer materials to produce a given level of output than expected, the material quantity variance is said to be favorable. The material quantity variance in this example is favorable because the company manufactured the output using a lesser quantity of materials than what was planned in the budget. Finish the materials quantity variance calculation by multiplying the difference of the standard and actual quantities by the standard cost. Find the materials quantity variance by multiplying the standard cost by the difference between the standard and actual quantities. The material quantity variance is also known as the material usage variance and the material yield variance.

Unfavorable Material Quantity Variance

Another element this company and others must consider is a direct materials quantity variance. The materials quantity variance is one of several cost accounting metrics that manufacturers review to measure manufacturing efficiency. Keeping an eye on variances helps manufacturers identify and remedy issues as they crop up. Use the following information to calculate direct material quantity variance.

For instance, rent is usually subject to a lease agreement that is relatively certain. Even though budget and actual numbers may differ little in the aggregate, the underlying fixed overhead variances are nevertheless worthy of close inspection. The total direct labor variance was favorable $8,600 ($183,600 vs. $175,000). However, discover more about cause branding vs cause marketing detailed variance analysis is necessary to fully assess the nature of the labor variance. As will be shown, Blue Rail experienced a very favorable labor rate variance, but this was offset by significant unfavorable labor efficiency. This pipe is custom cut and welded into rails like that shown in the accompanying picture.

We’ll discuss this in detail later, but companies that use the standard costing system to value their inventory correct their inventory account balances with the materials quantity variance. Studying and understanding the underlying factors contributing to material quantity variances is crucial. These factors can encompass elements such as material wastage, inconsistencies in production processes, shifts in material quality, and discrepancies in inventory management practices.

Direct materials quantity variance

Since variable overhead is consumed at the presumed rate of $10 per hour, this means that $125,000 of variable overhead (actual hours X standard rate) was attributable to the output achieved. Comparing this figure ($125,000) to the standard cost ($102,000) reveals an unfavorable variable overhead efficiency variance of $23,000. However, this inefficiency was significantly offset by the $20,000 favorable variable overhead spending variance ($105,000 vs. $125,000). Each bottle has a standard material cost of 8 ounces at $0.85 per ounce. Calculate the material price variance and the material quantity variance. Connie’s Candy paid $2.00 per pound more for materials than expected and used 0.25 pounds more of materials than expected to make one box of candy.

The producer must be aware that the difference between what it expects to happen and what actually happens will affect all of the goods produced using these particular materials. Therefore, the sooner management is aware of a problem, the sooner they can fix it. For that reason, the material price variance is computed at the time of purchase and not when the material is used in production. In a movie theater, management uses standards to determine if the proper amount of butter is being used on the popcorn. They train the employees to put two tablespoons of butter on each bag of popcorn, so total butter usage is based on the number of bags of popcorn sold.

Similarly, poorer quality materials may be more difficult to work with; this may lead to an adverse labour efficiency variance as the workforce takes longer than expected to complete the work. For a full appreciation of the impact of the mix change, the sales variances would also have to be considered, although it is likely to take time for sales volumes to be affected. Such variance amounts are generally reported as decreases (unfavorable) or increases (favorable) in income, with the standard cost going to the Work in Process Inventory account. The standard quantity of 19,200 is computed by multiplying the standard quantity per unit of 2kgs. It means that following the standard quantity, the company should have used 19,200 kgs.

The overall usage variance reported shows a $580 favourable variance, so it could be viewed that the change in the mix had a favourable impact overall. EXAMPLE
We will use this past exam question to demonstrate the calculation of the variances and analysis https://simple-accounting.org/ of performance. In closing this discussion of standards and variances, be mindful that care should be taken in examining variances. If the original standards are not accurate and fair, the resulting variance signals will themselves prove quite misleading.

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