Question

Gauging the Favorableness of Variances

When variances occur, they are described as being either favorable or unfavorable. When actual activity consumes more time or money than initially planned, an unfavorable variance exists. However, when actual activity consumes less time or money than initially planned, a favorable variance exists. Note that the terms favorable and unfavorable are used, rather than saying that a variance is good or bad, because until the cause of a variance is discovered, it is not clear whether a variance is either good or bad.

Note: Use the minus sign to indicate negative values (when the budgeted amount is greater than the actual).

If a company calculates that the actual cost for materials used was $3,400,000, and the amount budgeted for those materials was $4,600,000, the actual cost for materials used less the budgeted cost for materials used is $-1,200,000. This tells you that the actual cost at actual materials used is less than  the budgeted cost at actual hours worked.

What type of variance is this?
Favorable direct materials price variance

If a company calculates that the budgeted cost for actual materials used is $100,000, and the budgeted cost at the budgeted amount of materials to have been used is $140,000, the budgeted cost at actual materials used less the budgeted cost at budgeted materials to have been used is $-40,000.00. This tells you that the actual materials used at budgeted cost is less than  the budgeted materials used at budgeted cost.

What type of variance is this?
Favorable direct materials quantity variance

Feedback

Subtract the budgeted amount from the actual amount to get the sign correct. Note that if an amount spent or quantity used for materials goes down, then profits for the company go up, so a negative direct materials cost variance is favorable.

Likewise, an increase in the amount spent or quantity used would decrease profits, so this would be an unfavorable variance.

Standard Materials Cost

The controller at your shoemaking company has determined that under normal conditions, you will spend $8.50 per unit of materials, and it will take 2.8 units of material per pair of shoes. Given this information, calculate the standard cost of materials per pair of shoes. If require, round the standard cost per pair of shoes to the nearest cent.

Manufacturing Costs	Standard Price per Unit of Material	x	Standard Materials per Pair	=	Standard Cost per Pair
Direct Materials	$ per unit		units		$

Feedback

Use the standard price and standard materials values shown to compute the standard cost per pair.

Actual Materials Cost

During July, your shoemaking company incurred actual direct materials costs of $65,610 for 7,290 units of direct materials in the production of 2,200 pairs of shoes. Given this information, calculate the actual cost of materials per unit. If require, round the actual cost of materials per unit to the nearest cent.

Manufacturing Costs	Actual Total Cost of Materials	/	Actual Materials Used	=	Actual Cost per Unit
Direct Materials	$		units		$

Feedback

Use the actual total cost of materials and actual materials used as shown to compute the actual cost per unit of materials.

APPLY THE CONCEPTS: Conduct the Direct Materials Cost Variance Analysis

Complete the following graphic to compute the direct materials price variance, the direct materials quantity variance, and the total direct materials cost variance for your shoe-making business. When required, enter the rates as dollars and cents. If required, use the minus sign to indicate a negative value.

Illustrated Example: Calculating Direct Materials Cost Variance

Actual Cost						Standard Cost
Actual Materials	x	Actual Rate		Actual Materials	x	Standard Rate		Standard Materials	x	Standard Rate
	x	$			x	$			x	$
	=	$			=	$			=	$
		Direct Materials Price Variance				Direct Materials Quantity Variance
		$	-	$		$	-	$
			=	$	U		=	$	U
			Total Direct Materials Cost Variance
				$	-	$
					=	$	U

Answer 1

The answer is provided in Parts as required in the question:-

Answer to part (a):

The standard cost of materials per pair of shoes is-

Manufacturing Costs	Standard Price	x	Standard Materials	=	Standard Cost
	per Unit of Material		per Pair		per Pair
Direct Materials	$ 8.5 per unit		2.8 units		$23.80

Answer to part (b):-

The actual cost of materials per unit is-

Manufacturing Costs	Actual Total Cost	/	Actual Materials	=	Actual Cost
	of Materials		Used		per Unit
Direct Materials	$65,610		7290 units		$9

Answer to part (c):-

Direct Materials Cost Variance Analysis

Particulars	Standard cost for Actual Output				Actuals
	Quantitiy	Rate	Amount($)		Quantitiy	Rate	Amount($)
Material	6160                 (2.8*2200)	8.5	52,360		7,290	$9	65,610

Statement showing Variances:-

Variance	Formula	Workings	Amount($)
Direct Materials Price Variance	(Standard Price- Actual price)*Actual Price	= (8.5-9)*7290	3,645.00	U
Direct Materials Quantity Variance	Standard Quantity - Actual Quantity)*Standard Price	= (6160-7290)*8.5	9,605.00	U
Total direct materials cost variance	Standard cost - Actual cost	= 52,360-65,610	13,250.00	U