What Are Direct Material Cost Variances?
Direct material cost variance refers to the difference between direct materials’ actual and standard costs. It is calculated using actual output.
Direct material cost variance is important for cost control and profitability analysis in manufacturing companies. It can be used to assess the effectiveness of purchasing strategies and identify potential cost savings opportunities.
Reasons for Direct Material Cost Variance
The most important factor in material cost variance is the type of materials used. If a project requires expensive materials, the cost of the project will increase. The amount of materials used is also a major factor. The cost will increase if a project requires a large amount of material. The size of the project is another factor. If a project is large, the cost will increase. The location of the project is also a factor. If a project is located in a remote area, the cost will increase.
The variance might have been caused either because of changes to the quantity of material used or the price of the material. For example, a higher amount of raw materials might have been used by a company for a given level of output than the standard, resulting in an adverse variance.
Types of Direct Material Cost Variance
Because two different factors are affecting the total direct material cost variance, they must be divided into the following 2 types:
- Direct material price variance: This is the difference between the actual and standard cost of the actual quantity of direct materials used.
- Direct material usage variance: This is the difference between the standard quantity of raw materials that should have been used to produce a given level of actual output and the quantity that was actually used.
The following are the formulas for calculating each of these variances:
- Direct material price variance:
Actual quantity of material x (Actual price per kilo – Standard price per kilo) - Direct material usage variance:
Standard price x (Actual quantity of material used – Standard quantity of material) - Total material cost variance:
Direct material price variance + Direct material usage variance
For example, the following information is given about a product:
- Actual quantity of materials used: 520 kg
- Actual cost: $1092
- Standard cost: $1040
- Number of units produced: 100
- Standard usage: 500 kg
The direct material price variance = $1040 – 1092 = $52 adverse
The direct material usage variance = $2(500 – 520)= $40 adverse
The direct material cost variance = $92 adverse
Who is Responsible for Direct Material Cost Variance?
The responsibility for the Direct Material Price Variance usually lies with the purchasing agent. The price of the direct material is indeed out of the control of the purchasing agent. However, that is just one factor. The price variance can also be influenced by factors such as quality, quantity, discount, the distance of the source of material from the plant and so on. On the other hand, the production manager is responsible for the Direct Material Usage Variance.
In combination with price and usage, the combined responsibility for the Direct Material Cost Variance lies with the purchasing agent and production manager.
