Cost Accounting

# Direct Material Cost Variances

Direct material cost variance refers to the difference between the actual and standard cost of direct materials. It is calculated using actual output. 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.

Because two different factors are affecting the total direct material cost variance, they must be divided into the following 2 types:

1. Direct material price variance: This is the difference between the actual and standard cost of the actual quantity of direct materials used.
2. 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:

1. Direct material price variance:

Actual quantity of material x (Actual price per kilo – Standard price per kilo)
2. Direct material usage variance:

Standard price x (Actual quantity of material used – Standard quantity of material)
3. 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. It is true that the price of the direct material is out of the control of purchasing agent, however, that is just one factor. The price variance can also be influenced by factors such as quality, quantity, discount, distance of 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 of price and usage, the combined responsibility for the Direct Material Cost Variance lies with purchasing agent and production manager.