1. Direct Material Variances Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 45

2. Causes of Material Variances  Two causes  Price  Paid more or less than allowed in the budget for each unit of material purchased  Quantity  Used more or less than allowed in the budget

3. Material Variances PQPQ A S S S A A A S Actual Price X Actual Quantity Purchased Actual Price X Actual Quantity Purchased Standard Price X Actual Quantity Used Standard Price X Actual Quantity Used Standard Price X Standard Quantity Allowed Standard Price X Standard Quantity Allowed Standard Price X Actual Quantity Purchased Standard Price X Actual Quantity Purchased Material Price Variance Material Price Variance Material Quantity Variance Material Quantity Variance p u p

4. Material Variances PQPQ A S SS A A AS Material Price Variance Material Quantity Variance Indicates if materials cost more or less than allowed. Indicates if more or less materials were used than allowed. Total Materials Variance

5. Turtle Town has the following direct material standard for its Turtle floats: 0.2 lb. of resin per float at $5.00 per lb. Resin purchased: 440 pounds at $4.85 per pound Resin used: 390 pounds to make 1,980 floats Material Variances Example = $2,134 = $2,200 = $1,950 = $1,980 Price variance $66 favorable Quantity variance $30 favorable PA $4.85. S $5.00 S $5.00 S $5.00 × × × × QA p 440 lbs A p 440 lbs Au 390 lbs S 0.2 x 1980

6. Isolation of Material Variances Price Variance Isolated at the purchase date Computed on the entire quantity purchased Price Variance Isolated at the purchase date Computed on the entire quantity purchased Quantity Variance Isolated at the date used in production Computed only on the quantity used Quantity Variance Isolated at the date used in production Computed only on the quantity used Because this is the earliest point in time in which the variance can be determined We need the variance as early as possible to make product pricing or quantity changes. As a purchasing manager, I need the price variance sooner so that I can better identify purchasing problems.

7. Responsibility for Material Variances I am not responsible for this unfavorable material quantity variance. You purchased cheap material, so my people had to use more of it. You used too much material because of poorly trained workers and shoddy equipment maintenance, and you are a lousy scheduler! You make me overnight the material making it cost more, causing unfavorable price variances.

8. Variances - Good or Bad? actual > standard Unfavorable Variance actual < standard Favorable Variance Favorable variances are not always good. Unfavorable variances are not always bad. Favorable variances are not always good. Unfavorable variances are not always bad.

9. 9 The End