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    2-Direct Material Usage Variance - Formula - Example - Analysis

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    2-Direct Material Usage Variance - Formula - Example - Analysis

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    63 views9 pages
    2-Direct Material Usage Variance _ Formula _ Example _ Analysis

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    2-Direct Material Usage Variance _ Formula _ Example _ Analysis

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    2-Direct Material Usage Variance _ Formula _ Example _ Analysis

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    © All Rights Reserved
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    Download as pdf or txt
    63 views9 pages

    2-Direct Material Usage Variance - Formula - Example - Analysis

    Uploaded by

    VashirAhmad
    2-Direct Material Usage Variance _ Formula _ Example _ Analysis

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    © All Rights Reserved
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    Accounting-Simplified.

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    Introduction to Management
    Accounting

    Functions of Management
    Accounting

    Management Accounting Concepts

    Opportunity Cost

    Introduction to Variance Analysis

    Direct Material Price Variance


    D ire c t Ma te ria l U s a g e
    V a ria nc e

    Direct Material Mix Variance

    Direct Material Yield Variance

    Direct Labor Rate Variance

    Direct Labor Efficiency Variance

    Direct Labor Idle Time Variance

    Sales Price Variance

    Sales Volume Variance

    Sales Mix Variance


    Sales Quantity Variance
    Variable Overhead Spending
    Variance
    Variable Overhead Efficiency
    Variance

    Fixed Overhead Total Variance


    Fixed Overhead Spending Variance

    Fixed Overhead Volume Capacity &


    Efficiency Variance

    Limitations of Standard Costing &


    Variance Analysis

    Relevant Cost and Decision Making

    Relevant Cost of Labor

    Relevant Cost of Materials

    Limiting Factor Analysis

    Single Limiting Factor Analysis

    Linear Programming
    Graphical Method
    Graphical Method Example

    Equation Method

    Budgeting

    High Low Method

    Investment Appraisal

    Time Value of Money

    Accounting Rate of Return Direct Material Usage Variance


    Internal Rate of Return
    Definition
    Modified Internal Rate of Return
    Direct Material Usage Variance is the measure of difference between the actual quantity of material utilized during a period and
    Payback Period the standard consumption of material for the level of output achieved.
    Discounted Payback Period

    1. Definition
    2. Formula

    3. Example

    4. Analysis

    5. MCQ

    Formula
    Direct Material Usage Variance:

    = Actual Quantity x Standard Price - Standard Quantity x Standard Price

    = Standard Cost of Actual Quantity - Standard Cost of Standard Quantity

    = (Actual Quantity - Standard Quantity) x Standard Price

    Since the effect of any variation in material price from the standard is calculated in the material price variance, material usage
    variance is calculated using the standard price.

    Example
    Cement PLC manufactured 10,000 bags of cement during the month of January. Consumption of raw materials during the
    period was as follows:

    Standard Usage Per


    Material Quantity Used Actual Price Standard Price
    Bag

    Limestone 100 tons 11 KG $75/ton $70/ton


    Clay 150 tons 14 KG $21/ton $20/ton
    Sand 250 tons 26 KG $11/ton $10/ton

    Material Usage Variance will be calculated as follows:

    Step 1: Calculate Standard Quantity


    Limestone: 10,000 units x 11 / 1000 = 110 tons
    Clay: 10,000 units x 14 / 1000 = 140 tons
    Sand: 10,000 units x 26 / 1000 = 260 tons

    Step 2: Calculate the Variance


    Material Usage Variance = [Actual Quantity - Standard Quantity (Step 2)] x Standard Price

    Limestone: (100 - 110) x $70 = ($700) Favorable


    Clay: (150 - 140) x $20 = $200 Adverse
    Sand: (250 - 260) x $10 = ($100) Favorable
    Total Usage Variance ($600) Favorable

    Note: Actual price paid for the acquisition of materials shall be ignored since the variation between standard price is
    already accounted for in the material price variance.

    Analysis
    A favorable material usage variance suggests efficient utilization of materials.

    Reasons for a favorable material usage variance may include:

    Purchase of materials of higher quality than the standard (this will be reflected in adverse material price variance)
    Greater use of skilled labor
    Training and development of workforce to improve productivity
    Use and improvement of automated manufacturing tools and processes

    An adverse material usage variance indicates higher consumption of material during the period as compared with the standard
    usage.

    Reasons for adverse material usage variance include:

    Purchase of materials of lower quality than the standard (this will be reflected in a favorable material price variance)
    Use of unskilled labor
    Increase in material wastage due to depreciation of plant and equipment
    Newsletter
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    Test Your Understanding
    Email *
    Fresh PLC is a manufacturer of toothpaste. One of the ingredients
    of Fresh Toothpaste is sodium fluoride powder. Fresh PLC
    purchased 10,000 KG of sodium fluoride at the cost of $20,000 ($2
    per KG) out of which it utilized 9,000 KG during the period.

    Further information includes the following:

    -Standard price of sodium fluoride is $1.5 per KG


    -Standard usage of fluoride is 10 grams per toothpaste
    -Fresh PLC manufactured 1 million toothpastes during the period 8
    Like
    What is the material usage variance?
    4 222
    Zero

    -$1,500 Favorable

    -$1,500 Adverse 58.3K 4

    -$2,000 Adverse

    Prev Next
    Direct Material Mix Variance
    -50% -30%

    -10%
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    Name

    Qwequ Kakra • a year ago


    how can i reference information retrieved here
    △ ▽ • Reply • Share ›

    AccountingSimplified Mod > Qwequ Kakra • a year ago


    Hi. You may reference information from this website as follows:

    Ammar Ali, Abdul Majid. (2010). "Insert Page Title of the article". Available: accounting-
    simplified.com. Last accessed "Insert the date on which the article is accessed".
    △ ▽ • Reply • Share ›

    Swapan Baksi • 3 years ago


    Where is the 1000 coming from in the calculations for standard quantity for limestone, clay and sand?
    △ ▽ • Reply • Share ›

    AccountingSimplified Mod > Swapan Baksi • 3 years ago


    1000 is the conversion factor used to convert Kilograms into equivalent units of Tons. 1000 KG
    equals 1 Metric Ton.
    △ ▽ • Reply • Share ›

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