Direct materials total variance, Cost Accounting

Direct Materials Total Variance

Direct materials total variances refer to the difference between the standard direct material cost of the actual production volume and the actual cost of the direct material.  The direct materials total variances are a sum of two sub-variances, that is:

i. Direct Material Usage Variance, and

ii. Direct Material Price Variance.

i. The Direct Material Price Variance Refers to the difference between the actual purchase price and the standard price for the actual quantity of materials. It can be calculated at the time of purchase or time of usage.  The latter is exact to the quantity of material employed in production.  However, in the calculation of direct material price variance, generally the quantity purchased is employed as the basis of the variance.

Diagrammatically, the direct material price variance can be illustrated as follows:

1211_Direct Materials Total Variance.png

    Actual Quantity of  Direct Material Purchased                  Actual quantity of Direct Material Purchased 

                           x  Actual Price                                                         x  Standard Price

The above diagram can be summarized the details in the form of an equation given as:

Direct material = (Actual Quantity x Actual Price) - (Actual Quantity x Standard Price)

Price Variance = (AQ.AP) - (AQ.SP)

Factoring out the actual quantity from the equation, we receive:

Direct Material Price Variance = AQ (AP - SP)

From the above equation, it is clear that the direct material price variance is as a consequence of the actual purchase price of direct materials being different from the standard p rice of the direct materials.

Posted Date: 2/7/2013 6:35:23 AM | Location : United States







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