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Direct Materials Variances

During 2017, The Unknown Comic sold 6,300 units. You will analyze direct materials costs in greater detail using the following two numbers from the flexible budget performance report:

• the actual dollar amount spent for direct materials ($22,785) and
• the flexible budget amount for direct materials ($18,600).

You will not use the static budget amount of $19,200 for this analysis.

You are comparing what the company actually spent for direct materials in 2017—$22,785—with the estimated amount for direct materials based on the flexible budget—$18,600. The company spent $4,185 more than it expected. You need to know why this happened. You would calculate the cost (price) variance and the efficiency (quantity) variance to help you figure out what happened. You would use the following information to calculate the variances:

• standard cost per pound = $3.00
• actual cost per pound = $3.50
• standard quantity = 1lb per unit x 6,200 units = 6,200 lbs
• actual quantity = 6,510 lbs

The cost, efficiency, and total variances for direct materials are calculated as shown below:

The company spent a total of $4,185 more than expected. You can break this number down as follows:

• Of this amount, $3,255 was due to the fact that the price of materials was higher than expected. The company expected to pay $3.00 per pound, but ended up spending $3.50.
• Of this amount, $930 was due to the fact that more material was used than expected. The company expected to use 6,200 pounds, but ended up using 6,510 pounds.

By breaking down the different standards and comparing the actual results, you can determine exactly where the changes occurred and provide an explanation to upper management.

Why is the direct materials variance occurring? There are a number of possible answers:   

• Purchasing did not properly research materials costs.
• Required materials were not available, and therefore the company needed to purchase from an alternate vendor with a higher cost.
• An inexperienced workforce created excess waste, the estimates for yardage were incorrect, or the new materials did not meet specifications.