Direct material yield variance explanation, formula, example

For that reason, the material price variance is computed at the time of purchase and not when the material is used in production. For Boulevard Blanks, let’s assume that the standard cost of lumber is set at $6 per board foot and the standard quantity for each blank is four board feet. Based on production and sales being equal at 1,620 units, the total standard cost would have been $38,880. Direct material direct material variance quantity variance is calculated to determine the efficiency of the production department in converting raw material to finished goods. In order to improve efficiency, wastage of raw material must be reduced. A negative value of direct material quantity variance is generally unfavorable and it implies that more quantity of direct material has been used in the production process than actually needed.

1. The difference between the expected and actual cost incurred on purchasing direct materials, expressed as a positive or negative value, evaluated in terms of currency.
2. A company can compute these materials variances and, from these calculations, can interpret the results and decide how to address these differences.
3. 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.
4. Where,SQ is the standard quantity allowed,AQ is the actual quantity of direct material used, andSP is the standard price per unit of direct material.

The actual price must exceed the standard price because the material price variance is adverse. 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. One more, the favorable variance may arise from the purchase of low-quality material.

Direct Materials Quantity Variance

Connie’s Candy paid \(\$2.00\) per pound more for materials than expected and used \(0.25\) pounds more of materials than expected to make one box of candy. If the total actual cost is higher than the total standard cost, the variance is unfavorable since the company paid more than what it expected to pay. If the total actual cost incurred is less than the total standard cost, the variance is favorable. Standard costing allows comparison between actual costs incurred and budgeted costs based on standards.

What is the Direct Material Variance?

A positive value of direct material quantity variance is favorable implying that raw material was efficiently converted to finished goods. An adverse or unfavorable material quantity variance occurs when the actual volume of materials used in production exceeds the standard quantity that is expected for the level of output in a period. The difference between the expected and actual cost incurred on purchasing direct materials, expressed as a positive or negative value, evaluated in terms of currency. The combination of the two variances can produce one overall total direct materials cost variance. According to standards, the company was allowed to use an input of 35,574 tons to produce an output of 32,340 tons (the actual output). However, it used only 34,100 tons of materials which resulted in a favorable direct material yield variance.

Unfavorable Material Quantity Variance

In this case, the actual price per unit of materials is $6.00, the standard price per unit of materials is $7.00, and the actual quantity used is 0.25 pounds. This is a favorable outcome because the actual price for materials was less than the standard price. With either of these formulas, the actual quantity used refers to the actual amount of materials used to create one unit of product. The actual price paid is the actual amount paid for materials per unit. If there is no difference between the standard price and the actual price paid, the outcome will be zero, and no price variance exists. As you’ve learned, direct materials are those materials used in the production of goods that are easily traceable and are a major component of the product.

Sweet and Fresh Shampoo Materials

Standard cost is the amount the company expect to pay to get the same quantity of material. The difference of actual and standard cost raise due to the price change, while the material quantity remains the same. It is one of the variances which company need to monitor beside direct material usage variance. Direct material price variance (DM Price Variance) is defined as the difference between the expected and actual cost incurred on purchasing direct materials. It evaluates the extent to which the standard price has been over or under applied to different units of purchase.