Definition
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.
Formula
Direct Material Usage 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.
Example
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 |
$7o |
= |
($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.
Analysis
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.
Quiz
How much do you know about direct material usage variance?
Take the free quiz below and find out!
Question 1
Fresh PLC is a manufacturer of toothpaste. One of the ingredients of Fresh Toothpaste is sodium fluoride powder. Fresh PLC purchased 10,000 KG of sodium fluoride at the cost of $20,000 ($2 per KG) out of which it utilized 9,000 KG during the period.
Further information includes the following:
- Standard price of sodium fluoride is $1.5 per KG
- Standard usage of fluoride is 10 grams per toothpaste
- Fresh PLC manufactured 1 million toothpastes during the period
What is the material usage variance?
Zero
Incorrect.
[10,000 (Purchases) - 1 million x 0.01 (Standard Usage)] x $1.5 (Standard Price)
Material usage variance is calculated using the quantity of material utilized during the period rather than the quantity purchased.
$1,500 Favorable
Correct.
[9,000 (Actual Usage) - 1 million x 0.01 (Standard Usage)] x $1.5 (Standard Price)
$1,500 Adverse
Incorrect.
[9,000 (Actual Usage) - 1 million x 0.01 (Standard Usage)] x $1.5 (Standard Price)
Less material has been utilized (9,000 KG) than the standard quantity (10,000 KG) therefore resulting in a favorable material usage variance rather than adverse.
$2,000 Adverse
Incorrect.
[9,000 (Actual Usage) - 1 million x 0.01 (Standard Usage)] x $2 (Actual Price)
Material usage variance must be calculated using the standard price rather than the actual price.