Compute direct materials quantity variance. What are its possible reasons?
When actual quantity of materials used deviates from the standard quantity allowed to manufacture a certain number of units, materials quantity variance occurs. This is a variance of physical quantity but is also reported in dollars for proper financial measurement. To express this variance in dollars, both actual quantity used and standard quantity allowed are multiplied by standard price per unit of materials. Read direct materials price and quantity standards article to understand how standard price and quantity of direct materials are set.
Formula of direct materials quantity variance:
This variance may be computed using the following formula:
Direct materials quantity variance = (Actual quantity used × Standard rate) – (Standard quantity allowed × Standard rate)
Angro Limited – a single product company – uses a perfect standard costing system. The normal wastage and inefficiencies are taken into account while setting direct materials price and quantity standards. Variances are calculated and reported at regular intervals to ensure the quick remedial actions against unfavorable situations.
The standard quantity to produce a unit of product is 1.5kg. Angro purchases direct materials from its suppliers @ $2.00 per kg. During December 2012, 5,000 units were produced using 8,000kg of direct materials.
Required: Calculate direct materials quantity variance. Also indicate whether it is favorable or unfavorable.
Direct materials quantity variance = ( 8,000kg × $2.00 ) – ( 7,500kg* × $2.00)
= $16,000 – $15,000
= $1,000 Unfavorable
*(5,000 units × 1.5kg = 7,500kg)
The variance is unfavorable because the actual usage of materials (8,000 kg) is more than what has been allowed (7,500 kg) by standard to manufacture 5,000 units.
This variance can also be computed by using the factored form of above formula:
Direct materials quantity variance = SR × (AQ – SQ)
= $2.00 × (8,000kg – 7,500kg)
= $2.00 × 500kg
= $1,000 Unfavorable
Reasons of unfavorable materials quantity variance:
An unfavorable materials quantity variance means excessive use of direct materials. The excessive use of direct materials may be the result of a number of reasons including:
- Inexperienced or untrained workers
- Lack of motivation
- Lack of proper supervision
- Use of outdated machinery
- Faulty equipment
- Purchase of unsuitable or substandard materials.
- Frequent power failures (wastage may occur due to unscheduled stop and start of machinery and equipment )
Responsibility of direct materials quantity variance:
It is the responsibility of production manager to keep a check on excessive use of materials. However if purchase manager purchases low quality materials to improve the direct materials price variance then purchasing department would be considered responsible for the variance.
For quick remedial actions, the variance should be brought to the attention of concerned persons as soon as possible.