Companies use direct materials, also called raw materials, to produce products. Before the accountant determines a direct materials variance, they need to know which direct materials the company uses in production. The accountant also must determine the value between the raw materials price and the output from the raw materials. Standard price per unit is the uniform cost for a good or service, based on its historical cost, its replacement cost, or an analysis of its competitive position in the market. Standard quantity allowed is the result of multiplying actual units of production by the standard material amount each unit requires. Standard quantity per unit is the amount of materials that should have been used to manufacture units of output during a period.
Accountants use variance calculations to get the total direct materials variance.Direct materials purchased is calculated by taking the actual quantity (AQ) of input at actual price (AP).
Assume that a furniture maker has previously bought wood to make tables at $4.00 per yard. The purchasing manager finds a deal and is able to buy the wood at $3.75 per yard instead. The production line is scheduled to make 1,100 units. However, because the new, cheaper wood is harder to work with, workers make only 1,000 units. The production manager now needs to calculate whether the total variance is favorable or unfavorable.
Direct Materials Variance Calculations
|Actual at Actual||Actual at Standard||Standard at Standard|
|Actual Quantity||Actual Price||Total||Actual Quantity||Standard Price||Total||Standard Quantity||Standard Price||Total|