Direct Material Variances (Cambridge International A-Level Accounting)
Material variances
Spec point — how to calculate the following variances: – direct material price and usage
Material variances
How to calculate the material variances?
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The total direct material variance is the difference between the flexed budgeted cost and the actual cost for direct materials
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It is split into two variances
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Direct material price variance
- The variance due to the difference between the budgeted and actual price
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Direct material usage variance
- The variance due to the difference between the flexed budgeted and actual quantity of material
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| Total direct material variance | |
|---|---|
| What is the formula? | (standard quantity for actual production × standard price) - (actual quantity used × actual price) |
| What are the steps? | - Find total budgeted cost for direct materials by multiplying the standard price per material with the standard quantity expected for the actual output - Find total actual cost for direct materials by multiplying the actual price per material with the actual quantity used - Find the difference between the two costs |
| When is it favourable? | The total actual cost is less than the total standard cost |
| Direct material price variance | |
| What is the formula? | actual quantity used × (standard price – actual price) |
| What are the steps? | - Find the difference between the actual price and the standard price per material - Multiply by the actual quantity used |
| When is it favourable? | The actual price is less than the standard price |
| Possible causes of variances | - Suppliers charging a different price - Changes in delivery cost - Changes in quantity purchased will lead to different material prices - Lower or higher quality of material will change the material price |
| Direct material usage variance | |
| What is the formula? | standard price × (standard quantity for actual production – actual quantity used) |
| What are the steps? | - Find the difference between the standard quantity expected for the actual output and the actual quantity used - Multiply by the standard price per unit |
| When is it favourable? | The actual quantity of materials used is less than the standard quantity expected for the actual output |
Exam Hint For the total direct material variance and direct material usage variance, make sure you flex the budgeted data so that it reflects the actual number of units produced.
Also remember, the actual and standard quantity is referring to the quantity of material needed and not the quantity of units.
What are the possible causes of variances?
- Changes in the quality of material will impact the usage
- Less or more skilled workers will also lead to variances in the amount of material used
- Increase or decrease in waste of material
Worked Example Brakes Ltd make brake pads. Here is the annual budgeted and actual information:
Budgeted Actual Production (units) 10 000 12 000 Material price per kg ($) $6.50 $6.00 Material used per unit (kg) 5 kg 6 kg Calculate:
(i) direct material price variance
(ii) direct material usage variance
(iii) total direct material variance
Answer:
(i) Direct Material Price Variance
Find the actual quantity used
12 000 × 6 kg = 72 000 kg
Use the formula
- actual quantity used × (standard price – actual price)
- It is favourable because the actual price on direct materials is less than budgeted
72 000 × ($6.50 - $6.00)
Final answer: $36 000 Favourable
(ii) Direct Material Usage Variance
Find the budgeted quantity of materials for the amount produced
- Ignore the budgeted units
- Multiply the actual number of units by the budgeted materials per unit
12 000 × 5 kg = 60 000 kg
Use the formula
- standard price × (standard quantity for actual production – actual quantity used)
- It is adverse because the actual quantity of materials used is more than budgeted
$6.50 × (60 000 - 72 000)
Final answer: $78 000 Adverse
(iii) Total Direct Material Variance
Combine the variances
Direct material price variance $36 000 FAV Direct material usage variance $78 000 ADV Total direct material variance $42 000 ADV Alternatively, you can use the formula
- (standard quantity for actual production × standard price) - (actual quantity used × actual price)
(60 000 × $6.50) - (72 000 × $6.00)
Final answer: $42 000 Adverse
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