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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.

9

The End