University:
Baltimore City Community College
Course:
ACT 221 | Principles of Financial Accounting I
Academic year:

2024
Views:

398

Pages:

2
Author:

Danny A.

Direct Material Variances Whenever the actual price paid for direct materials purchased differs from the standard, or the quantity of direct material used differs from the standard, a variance occurs. Two types of variances can be isolated for direct materials: (1) the direct material price variance that measures the difference between the actual acquisition price of direct materials and the standard price for direct materials, and (2) the direct material usage variance that measures the difference between the actual quantity of direct materials used during a period and the standard quantity of direct materials that should have been used to produce the current period's output. These variances are calculated as follows: In this illustration the amount of direct materials purchased is assumed to be equal to the amount of direct material used during the period. When the amount of purchases and usage differs, the analysis of direct material variance takes a slightly different form as follows: The Bellow Corporation manufactures a product for which the standard cost of direct material is $2 per pound and the standard quantity of direct material is 3 pounds per unit of the product. During January 1992 62,500 pounds of the direct material were purchased at $2.10 per pound. All 62,500 pounds of the direct material were used in producing 20,000 units. Bellow Corporation's direct materials variances are analyzed in the following manner: As discussed earlier in the chapter, variances are labeled as either favorable (F) or unfavorable (U). A favorable variance occurs when the actual results of operations produce a lower cost than the standard. For example, a purchase price that is lower than the standard price results in a favorable direct material price variance. An unfavorable variance occurs when actual results produce costs in excess of the standard. For example, the use of more direct material than expected to produce a unit results in an unfavorable direct material usage variance.