1. AMIS 212 Introductory Managerial Accounting Professor Marc Smith CHAPTER 1 MODULE 1 Chapter 10 Module 2

2. 2 Direct Material Variances: (1) Direct material price variance (2) Direct material quantity variance ●A positive variance is referred to as an unfavorable variance ●A negative variance is referred to as a favorable variance Chapter 10 Module 2: DM Variances

3. DM Price Variance = (AQ x AP) - (AQ x SP) A  stands for actual Q  stands for quantity P  stands for price S  stands for standard NOTE:The AQ in the DM price variance represents the actual quantity of direct materials purchased. Chapter 10 Module 2: DM Price Variance

4. DM Quantity Variance = (AQ x SP) - (SQ x SP) NOTE: The AQ in the DM quantity variance represents the actual quantity of direct materials used in production. The standard quantity (SQ) is calculated: (standard quantity of DM per unit x number of units produced) Chapter 10 Module 2: DM Quantity Variance

5. DM Price Variance = (AQ x AP) - (AQ x SP) ●where AQ = AQ purchased ●measures the difference between what was actually paid to purchase direct materials and what should have been paid, according to the standards DM Quantity Variance = (AQ x SP) - (SQ x SP) ●where AQ = AQ used in production ●measures the difference between how much in direct materials was actually used in production and how much should have been used, according to the standards Chapter 10 Module 2: DM Variances

6. DM Price Variance = (AQ x AP) - (AQ x SP) (130,000 x 0.11) - (130,000 x 0.10) 14,300 - 13,000 = $1,300 unfavorable ●Betty DeRose spent $1,300 more to purchase direct materials than she should have, given the standards Chapter 10 Module 2: Example #1

7. DM Quantity Variance = (AQ x SP) - (SQ x SP) (125,000 x 0.10) - [(67,500 x 2) x 0.10] 12,500 - 13,500 = $1,000 favorable ●Betty DeRose used $1,000 less in direct materials than she should have, given the standards Chapter 10 Module 2: Example #1

8. Hanson, Inc. has the following direct material standards to manufacture one units of its product, called a zippy: 1.5 pounds per zippy at $4 per pound Last week 2,800 pounds of direct materials were purchased at a cost of $3.90 per pound and 1,700 pounds were used to make 1,000 zippies. What was the direct material price variance ? a. $170 U b. $170 F c. $280 U d. $280 F Hanson, Inc. has the following direct material standards to manufacture one units of its product, called a zippy: 1.5 pounds per zippy at $4 per pound Last week 2,800 pounds of direct materials were purchased at a cost of $3.90 per pound and 1,700 pounds were used to make 1,000 zippies. What was the direct material price variance ? a. $170 U b. $170 F c. $280 U d. $280 F Chapter 10 Module 2: Review Question (2,800 x $3.90) - (2,800 x $4.00) = $280 F

9. Hanson, Inc. has the following direct material standards to manufacture one units of its product, called a zippy: 1.5 pounds per zippy at $4 per pound Last week 2,800 pounds of direct materials were purchased at a cost of $3.90 per pound and 1,700 pounds were used to make 1,000 zippies. What was the direct material quantity variance ? a. $800 U b. $800 F c. $5,200 U d. $5,200 F Hanson, Inc. has the following direct material standards to manufacture one units of its product, called a zippy: 1.5 pounds per zippy at $4 per pound Last week 2,800 pounds of direct materials were purchased at a cost of $3.90 per pound and 1,700 pounds were used to make 1,000 zippies. What was the direct material quantity variance ? a. $800 U b. $800 F c. $5,200 U d. $5,200 F Chapter 10 Module 2: Review Question (1,700 x $4.00) - [(1,000 x 1.5) x $4.00] = $800 U