Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of “The Arizona Republic,” “Houston Chronicle,” The Motley Fool, “San Francisco Chronicle,” and Zacks, among others. Describe the direct and indirect resources used in the production of goods and services. Direct materials refer to basic materials that form an integral part of a finished product.

If more materials were used than the standard quantity, or if a price greater than the standard price was paid, the variance is unfavorable. Even though the answer is a positive number, the variance is unfavorable because more materials were used than the standard quantity allowed to complete the job. If the standard quantity allowed had exceeded the quantity actually used, the materials usage variance would have been favorable.

How to calculate materials quantity variance

Your materials quantity variance will increase because you’ll have to buy more peaches to make the same number of cobblers. The Aptex company manufactures and sells small speakers that are used in mobile phones. The speakers are sold in bulk to mobile manufacturing companies where complete mobiles are produced. One meter of the copper coil is the standard requirement to manufacture one speaker.

• Clearly, this is unfavorable because the actual price was higher than the expected price.
• Standard cost has to be calculated with reference to standard quantity for actual output.
• Also see formula of gross margin ratio method with financial analysis, balance sheet and income statement analysis tutorials for free download on Accounting4Management.com.
• The emphasize must be on control in the sense of supporting the line managers and assisting them in meeting the goals that they have participated in setting for the company.
• Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.
• A template to compute the total variance, direct materials quantity variance, and the direct material price variance is provided below.

In business, management sets the standards of what quantity of materials should be used for a particular job. Especially on a manufacturing production line, unit cost plays a significant role in the final product cost and thus affects overall profits. Knowing the variance in quantity of materials budgeted versus the actual amount used to provide a service or make a product shows the effect the variance has on the final cost. A number of factors determine whether the direct materials efficiency variance end as unfavorable or not. Standard costing allows comparison between actual costs incurred and budgeted costs based on standards. In a manufacturing environment, variance analysis may be performed separately for the different components of costs, i.e. direct materials, direct labor, and factory overhead.

Direct Materials Efficiency Variance

A favorable outcome means you spent less on the purchase of materials than you anticipated. If, however, the actual price paid per unit of material is greater than the standard price per unit, the variance will be unfavorable. An unfavorable outcome means you spent more on the purchase of materials than you anticipated. The direct materials variance analysis has different components. These components include direct materials purchased, direct materials inventory, and work in process inventory.

Notice how the cause of one variance might influence another variance. This also might have a positive impact on direct labor, as less time will be spent dealing with materials waste. This setup explains the unfavorable total direct direct-material total variance materials variance of $7,200 — the company gains $13,500 by paying less for direct materials, but loses $20,700 by using more direct materials. To apply this method to the Band Book example, take a look at the next diagram.

Labor Variance

You’ll have a truer sense of your company’s total manufacturing costs when you properly account for variances in price, quantity, and efficiency. Beginning a production process with inferior materials in an attempt to save money can affect the direct materials variance. Lower-quality materials may require the use of more units of a particular material, resulting in an unfavorable direct materials efficiency variance. For example, if the actual cost is lower than the standard cost for raw materials, assuming the same volume of materials, it would lead to a favorable price variance (i.e., cost savings). In our example, DenimWorks should have used 278 yards of material to make 100 large aprons and 60 small aprons.