# Direct Materials Variance

Direct materials are one of the largest costs for most businesses, which is why managers calculate the difference in value from the raw materials price and the output from those materials.

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).
${\text{Direct Materials Purchased}}={\rm{AQ}\times{AP}}$
Direct materials inventory is calculated as actual quantity of input at standard price (SP).
$\text{Direct Materials}={\rm{AQ}\times{SP}}$
After each calculation, the accountant can view the amounts for the materials price variance and ultimately the spending variance. Direct materials price variance is the difference between the standard (or expected) cost of materials for a process or project and the actual cost for the actual quantity of material purchased.
${\text{Direct Materials Price Variance}}=({\rm{AQ}\times{AP}})-({\rm{AQ}\times{SP}})$
Calculations within parentheses always come first, so the accountant multiplies AQ by AP, then multiplies AQ by SP, and finally subtracts the second result from the first result. Direct materials quantity variance is the difference between the actual amount of materials used in the production process and the amount a company expected to use.
${\text{Direct Materials Quantity Variance}}=({\rm{AQ}\times {SP}})-({\rm{SQ}\times\rm{SP}})$
Total variance is equal to the price variance plus the quantity variance. Total variance shows the relationship between the actual cost and standard cost. Price variance shows the relationship between actual cost and actual use at standard price. Quantity variance shows the relationship between standard cost and actual use at standard price. Each of these relationships can help managers and accountants to determine total variance.

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
1,000 $3.75$3,750 1,000 $4.00$4,000 1,100 $4.00$4,400

Direct materials variance calculations include price and quantity variances.

Work in process inventory is the inventory that the company is manufacturing that is not completed yet. In manufacturing, the work in process is part of benchmarking because work in process inventory can be a significant asset for the company. From this information, the direct materials price variance is calculated.
\begin{aligned}({\rm{AQ}\times{AP}})-({\rm{AQ}\times{SP}})&=\3{,}750-\4{,}000\\&=-\250\;{\text{or}}\;\250\;{\text{Favorable}}\end{aligned}
This equation shows that the actual amounts are 250 better than the predicted amounts. The formula gives the actual quantity at actual price minus the actual quantity at standard price. Remember to perform the actions inside the parentheses first. Then the furniture maker calculates the direct materials quantity variance. \begin{aligned}({\rm{AQ}\times{SP}})-({\rm{SQ}\times{SP}})&=\4{,}000-\4{,}00\\&=-\400\;{\text{Favorable}}\end{aligned} This equation gives the actual quantity at standard price minus the standard quantity at standard price. Note that the sign of the variance is not important. The favorability or unfavorability is the important part. This means that there is650 total favorable variance.
$\650\;{\text{Favorable Change}}=\250+\400$
This is the difference between the actual at actual price and the standard at standard price. The underlying purpose of managerial accounting analysis is to make decisions. In this example, though the wood was less expensive, the overall variance was unfavorable. Based on this information, it is clear that the purchasing manager made a mistake by buying the cheaper wood. In the future, the company should use higher-quality wood.