Direct Material Usage Variance
Direct Material Usage Variance is the measure of difference between the actual quantity of material utilized during a period and the standard consumption of material for the level of output achieved.
Direct Material Price Variance:
|=||Actual Quantity x Standard Price||-||Standard Quantity x Standard Price|
|=||Standard Cost of Actual Quantity||-||Standard Cost of Standard Quantity|
|=||(Actual Quantity - Standard Quantity)||x||Standard Price|
Since the effect of any variation in material price from the standard is calculated in the material price variance, material usage variance is calculated using the standard price.
Cement PLC manufactured 10,000 bags of cement during the month of January. Consumption of raw materials during the period was as follows:
|Material||Quantity Used||Standard Usage Per Bag||Actual Price||Standard Price|
|Limestone||100 tons||11 KG||$75/ton||$70/ton|
|Clay||150 tons||14 KG||$21/ton||$20/ton|
|Sand||250 tons||26 KG||$11/ton||$10/ton|
Material Usage Variance will be calculated as follows:
Step 1: Calculate Standard Quantity
|Limestone:||10,000 units||x||11 / 1000||=||110 tons|
|Clay:||10,000 units||x||14 / 1000||=||140 tons|
|Sand:||10,000 units||x||26 / 1000||=||260 tons|
Step 2: Calculate the Variance
|Material Usage Variance = [Actual Quantity - Standard Quantity (Step 2)] x Standard Price|
|Limestone:||(100 - 110)||x||$70||=||($700)||Favorable|
|Clay:||(150 - 140)||x||$20||=||$200||Adverse|
|Sand:||(250 - 260)||x||$10||=||($100)||Favorable|
|Total Usage Variance||($600)||Favorable|
Note: Actual price paid for the acquisition of materials shall be ignored since the variation between standard price is already accounted for in the material price variance.
A favorable material usage variance suggests efficient utilization of materials.
Reasons for a favorable material usage variance may include:
- Purchase of materials of higher quality than the standard (this will be reflected in adverse material price variance)
- Greater use of skilled labor
- Training and development of workforce to improve productivity
- Use and improvement of automated manufacturing tools and processes
An adverse material usage variance indicates higher consumption of material during the period as compared with the standard usage.
Reasons for adverse material usage variance include:
- Purchase of materials of lower quality than the standard (this will be reflected in a favorable material price variance)
- Use of unskilled labor
- Increase in material wastage due to depreciation of plant and equipment