A materials quantity variance compares the actual and expected direct material used in manufacturing a product. You have an unfavorable materials quantity variance when you use more material than expected. The material quantity variance is a subset of the quantity variance, since it only applies to materials (or, more accurately, direct materials) that are used in the production process. As an example of the quantity variance, ABC International uses 5,000 pounds of steel during a month of production, when the bill of materials for the items produced indicate that only 4,200 pounds should have been used. Since the standard price of steel is $20 per pound, ABC can value this variance at $16,000.
Material variance is the difference between the actual cost of direct materials and the expected cost of those materials. Standard direct material usage refers to the amount of materials allowed to be used per unit produced. In a multi-product company, the total quantity variance is divided over each of the products manufactured. For a full appreciation of the impact of the mix change, the sales variances would also have to be considered, although it is likely to take time for sales volumes to be affected. Any sales volume variance that does arise as a result of poor quality products is likely to arise in a different period from the one in which the mix and yield variances arose, and the correlation will then be more difficult to prove. The actual quantity used can differ from the standard quantity because of improved efficiencies in production, carelessness or inefficiencies in production, or poor estimation when creating the standard usage.
The material quantity variance can yield unusual results, since it is based on a standard unit quantity that may not be even close to actual usage. The material quantity is usually set by the engineering department, and is based on an expected amount of material that should theoretically be used in the production process, along with an allowance for a reasonable amount of scrap. If the standard is excessively generous, there will be a long series of favorable material quantity variances, even though the production staff may not be doing an especially good job. Conversely, a parsimonious standard allows little room for error, so there is more likely to be a considerable number of unfavorable variances over time. Thus, the standard used to derive the variance is more likely to cause a favorable or unfavorable variance than any actions taken by the production staff. If the actual quantity used is less than the standard quantity, the variance is favorable since the company was able to save on materials.
- This is a favorable outcome because the actual price for materials was less than the standard price.
- You multiply the difference by the standard cost in the next step, turning the material quantity variance into a dollar amount.
- Variances occur in most of the manufacturing processes and for almost all cost elements.
- A company can compute these materials variances and, from these calculations, can interpret the results and decide how to address these differences.
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They train the employees to put two tablespoons of butter on each bag of popcorn, so total butter usage is based on the number of bags of popcorn sold. Therefore, if the theater sells 300 bags of popcorn with two tablespoons of butter on each, the total amount of butter that should be used is 600 tablespoons. Management can then compare the predicted use of 600 tablespoons of butter to the actual amount used. If the actual usage of butter was less than 600, customers may not be happy, because they may feel that they did not get enough butter. If more than 600 tablespoons of butter were used, management would investigate to determine why.
Some reasons why more butter was used than expected (unfavorable outcome) would be because of inexperienced workers pouring too much, or the standard was set too low, producing unrealistic expectations that do not satisfy customers. A number of parties may be held responsible for an unfavorable quantity variance (or take credit for a favorable variance!). https://www.wave-accounting.net/ For example, the scrapping of a number of units in the production process may mean that the quality of incoming components was inadequate, which could be the problem of the purchasing department. Conversely, the same level of scrap may be caused by improper equipment setup, which is the responsibility of the industrial engineering staff.
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If your business makes fancy bow ties, the direct material is silk, for instance. Use the following information to calculate direct material quantity variance. Hence, the total material cost variance may result from the difference between the standard and actual quantities of materials used, the difference between the standard and actual prices paid for materials, or from a combination of the two. This year, Band Book made 1,000 cases of books, so the company enrolled agent salary should have used 28,000 pounds of paper, the total standard quantity (1,000 cases x 28 pounds per case). However, the company purchased 30,000 pounds of paper (the actual quantity), paying $9.90 per case (the actual price). The material mix variance is calculated as the difference between the standard cost of the actual input materials in the actual mix used, compared to the standard cost of the actual input materials if the standard mix had been used.
To make a batch of carrot cakes, you expect to use 60 pounds of carrots. Accountingo.org aims to provide the best accounting and finance education for students, professionals, teachers, and business owners. Before the year is out, you want to clear out all variance accounts to the cost of goods sold. Variances are temporary accounts, meaning they must have a zero balance at the end of the accounting period. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
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Because the company uses 30,000 pounds of paper rather than the 28,000-pound standard, it loses an additional $20,700. In this question, Angro has experienced an unfavorable direct materials quantity variance because the actual usage of materials (i.e., 8,000kgs) is more than the standard quantity allowed (i.e., 7,500 kgs) to manufacture 5,000 units pf product. Direct materials quantity variance is a part of the overall materials cost variance that occurs due to the difference between the actual quantity of direct materials used and the standard quantity allowed for the output. To compute the direct materials price variance, subtract the actual cost of direct materials ($297,000) from the actual quantity of direct materials at standard price ($310,500).
Understanding the Material Quantity Variance
A positive value of direct material quantity variance is favorable implying that raw material was efficiently converted to finished goods. With either of these formulas, the actual quantity used refers to the actual amount of materials used at the actual production output. The standard quantity is the expected amount of materials used at the actual production output. If there is no difference between the actual quantity used and the standard quantity, the outcome will be zero, and no variance exists. In other words, when actual quantity of materials used deviates from the standard quantity of materials allowed to manufacture a certain number of units, materials quantity variance occurs.
This also makes it easier for management to remediate any variances as promptly as possible, thereby keeping expenses down. Another element this company and others must consider is a direct materials quantity variance. With the help of machinery and other equipment, workers create finished goods that once started as raw materials.
This difference comes to a $13,500 favorable variance, meaning that the company saves $13,500 by buying direct materials for $9.90 rather than the original standard price of $10.35. In this case, the actual price per unit of materials is $9.00, the standard price per unit of materials is $7.00, and the actual quantity used is 0.25 pounds. This is an unfavorable outcome because the actual price for materials was more than the standard price. As a result of this unfavorable outcome information, the company may consider using cheaper materials, changing suppliers, or increasing prices to cover costs. In this case, the actual price per unit of materials is $9.00, the standard price per unit of materials is $7.00, and the actual quantity purchased is 20 pounds. The standard price of materials purchased by Angro is $2.00 per kg and standard quantity of materials allowed to produce a unit of product is 1.5kg.
This can be denoted as shown below (Adv or Fav), or by a clear ‘A’ or ‘F’. Avoid leaving your calculations as simply positive and negative figures as this leads to confusion and may not be awarded marks. Using the materials-related information given below, calculate the material variances for XYZ company for the month of October. The overall usage variance reported shows a $580 favourable variance, so it could be viewed that the change in the mix had a favourable impact overall. Again, remember to clearly state if the variance is adverse or favourable. There are number of different ways to lay out a yield variance calculations.
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When the mix and yield variances are considered, it is clear that the positive usage variance is caused by a change in the mix of inputs. It will need to be considered what impact this change of mix has had on the quality of the finished product and ultimately on sales. Again, this should be considered where information concerning this has been provided in the question. This variance demonstrates if more or less material is used than expected. Abnormal spoilage increases the amount of raw material consumed in manufacturing, creating an unfavorable materials quantity variance.
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