Direct material cost variance can be split into:
Calculation: actual total material costs - (actual quantity of total material used x budgeted price per unit of material used)
Interpretation: calculates the portion of variance driven by the changed prices of raw materials
Possible reasons for variances: price increases/discounts, changes in material quality (27; p.232-8), poor budgeting
Calculation: (actual quantity of total material used - budgeted quantity of total material used) x budgeted price per unit of material used
Interpretation: calculates the portion of variance driven by the changed quantity of raw materials consumed
Possible reasons for variances: changes in material quality, care devoted to quality control, thefts, errors in allocating material to products (27; p.232-8), change in wastage level due to changes in staff qualification and skills, poor budgeting
Budget: 5 units of raw material purchased at €8/piece; produced output is 1 000 units
Actual: 6 units of raw material purchased at €7/piece; produced output is 1 100 units
---------------------------------------------------------------------------------------------------------------------------------
Total variance = (6 * 7* 1 100) – (5 * 8 * 1 000) = 46 200 – 40 000 = 6 200 (unfavorable)
Direct material price variance = (6 * 7 * 1 100) – (1 100 * 6 * 8) = 46 200 – 52 800 = - 6 600 (favorable)
Direct material quantity (usage) variance = (1 100 * 6 – 1 000 * 5) * 8 = 12 800 (unfavorable)
Check: Price variance + Quantity variance = - 6 600 + 12 800 = 6 200