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Direct Material Variances
Managerial Accounting
Prepared by Diane TannerUniversity of North Florida
Chapter 45
Causes of Material Variances
• Two causes– Price
• Paid more or less than allowed in the budget for each unit of material purchased
– Quantity• Used more or less than
allowed in the budget
Material Variances
PQ
A S S SA A A S
Actual Price X
ActualQuantity Purchased
StandardPrice
XActual
QuantityUsed
StandardPrice
XStandardQuantityAllowed
StandardPrice
XActual
QuantityPurchased
Material Price
Variance
MaterialQuantity Variance
p up
Material Variances
P
Q
A S S S
A A A S
Material Price Variance
Material Quantity Variance
Indicates if materials cost more
or less than allowed.
Indicates if more or less materials were used than
allowed.
Total Materials Variance
Turtle Town has the following direct material standard for its Turtle floats: 0.2 lb. of resin per float at $5.00 per lb.
Resin purchased: 440 pounds at $4.85 per pound Resin used: 390 pounds to make 1,980 floats
Material Variances Example
= $2,134 = $2,200 = $1,950 = $1,980
Price variance$66 favorable
Quantity variance$30 favorable
P A $4.85 . S $5.00 S $5.00 S $5.00
× × × × Q Ap 440 lbs Ap 440 lbs Au 390 lbs S 0.2 x 1980
Isolation of Material Variances
Price Variance • Isolated at the purchase date• Computed on the entire quantity purchased
Quantity Variance• Isolated at the date used in production• Computed only on the quantity used
Because this is the earliest
point in time in which the
variance can be determined
We need the variance as early as possible to
make product pricing or quantity changes.
As a purchasing manager,I need the price variance
sooner so that I can better identify purchasing problems.
Responsibility for Material Variances
I am not responsible for this unfavorable material
quantity variance. You purchased cheapmaterial, so my peoplehad to use more of it.
You used too much material because of poorly trained
workers and shoddy equipment maintenance, and you are a lousy scheduler! You
make me overnight the material making it cost more,
causing unfavorable price variances.
Variances - Good or Bad?
actual > standardUnfavorable Variance
actual < standardFavorable Variance
Favorable variances are not always good.Unfavorable variances are not always bad.
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The End