Direct material variance definition
/What is the Direct Material Variance?
The direct material variance is the difference between the standard cost of materials resulting from production activities and the actual costs incurred. This measurement is derived as part of a standard costing system, and is intended to assist management in controlling costs. The direct material variance is comprised of two other variances, which are noted below. It is customary to calculate and report these two variances separately, so that management can determine if variances are caused by purchasing issues or manufacturing problems.
Purchase Price Variance
The purchase price variance is the difference between the standard and actual cost per unit of the direct materials purchased, multiplied by the standard number of units expected to be used in the production process. This variance is the responsibility of the purchasing department. The formula is as follows:
(Actual price - Standard price) x Actual quantity = Purchase price variance
Material Yield Variance
The material yield variance is the difference between the standard and actual number of units used in the production process, multiplied by the standard cost per unit. This variance is the responsibility of the production department. The formula is as follows:
(Actual unit usage - Standard unit usage) x Standard cost per unit = Material yield variance
Accounting for the Direct Material Variance
The direct material variance is usually charged to the cost of goods sold in the period incurred.
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Example of the Direct Material Variance
ABC International produces 1,000 green widgets and records an unfavorable direct material variance of $700. Further investigation reveals that the cost to purchase the various components was $3.50 per unit, versus a budgeted amount of $4.00 per unit. This represents a favorable purchase price variance of $500, which is calculated as:
($3.50 actual cost - $4.00 standard cost) x 1,000 standard units
In addition, ABC finds that the purchase price was so low because the raw materials were of unusually low quality, resulting in a great deal of scrap during the manufacturing process. As a result, the company used 1,300 units of raw material to produce 1,000 finished units. This represents an unfavorable material yield variance of $1,200, which is calculated as:
(1,300 actual units - 1,000 standard units) x $4.00 standard cost
Thus, by delving into the two types of variances, it is apparent that the purchasing manager of ABC is at fault; he saved money by purchasing raw materials of excessively low quality, and it resulted in a large unfavorable variance when units were scrapped during production.
Terms Similar to Direct Material Variance
The direct material variance is also known as the direct material total variance.