Materials cost variance scenario: One type of DM

Scenario 1: One type of DM

A Company produces Product A which uses only one direct material.

The following information was available for the month of April:

• Standard DM per unit of Product A: 2 kg
• Standard cost per unit of DM: $150
• Actual production achieved of Product A for the month of April: 134,000 units
• Actual materials purchased and used: 283,000 kg @ $143 per kg

Calculate the Direct Materials variances:

1. Materials price variance
2. Materials usage variance
3. Materials cost variance

Scenario 1.1. Materials price variance

$$\begin{array}{rl}\text{Materials Price Variance}& =(\text{SP}\times \text{AQ})-(\text{AP}\times \text{AQ})\\ & =(150\times 283,000)-(143\times 283,000)\\ & =42,450,000-40,469,000\\ & =1,981,000(\text{F})\end{array}$$

The variance is favorable because the actual price per unit of direct material ($143) is lower than standard price ($150).

Scenario 1.2. Materials usage variance

$$\begin{array}{rl}\text{Materials Usage Variance}& =(\text{SP}\times \text{SQ})-(\text{SP}\times \text{AQ})\\ & =(150\times 268,000)-(150\times 283,000)\\ & =40,200,000-42,450,000\\ & =2,250,000(\text{U})\end{array}$$

The Standard Quantity (SQ) is the standard quantity of DM required for the actual production $268,000=134,000\times 2$. The variance is unfavorable because the actual amount of materials used in production is higher than standard.

Scenario 1.3. Materials cost variance

$$\begin{array}{rl}\text{Materials Cost Variance}& =(\text{Standard Quantity}\times \text{Standard Price})-(\text{Actual Quantity}\times \text{Actual Price})\\ & =(\text{SP}\times \text{SQ})-(\text{AP}\times \text{AQ})\\ & =(150\times 268,000)-(143\times 283,000)\\ & =40,200,000-40,469,000\\ & =269,000(\text{U})\end{array}$$

The materials cost variance can also be a summation of the price and usage variances:

$$\begin{array}{rl}\text{Materials Cost Variance}& =\text{Materials Price Variance}+\text{Materials Usage Variance}\\ & =1,981,000(\text{F})+2,250,000(\text{U})\\ & =269,000(\text{U})\end{array}$$

The variance is unfavorable because the actual cost is higher than the standard costs.