Accounting (Year 12)
What is variance analysis?
Variance analysis is a budgeting tool used to evaluate performance in controlling expenses such as direct material costs or quantities and labour rates or hours.
Variance simply means the difference between the actual and the budgeted price of an expense or the quantity used for an expense.
What is Direct Material Usage Variance?
Direct Material Usage Variance measures the difference between the actual quantity of material used and the budgeted/expected quantity of direct materials.
Formula for direct material usage variance
DMUV = (Actual Quantity of Direct Materials Used - Budgeted Quantity of Direct Materials Used) * Standard Cost of Direct Material
Remember: It is the standard cost of direct materials that is applied to the quantity difference - not the actual price.
(Note: You do not need to remember this as it is on your formula sheet)
Unfavourable and Favourable Direct Material Usage Variances
Favourable - when the actual quantity used is lower than the budgeted quantity which will result in a negative answer
Unfavourable - when the actual quantity used is higher than the budgeted quantity which will result in a positive answer
Possible Explanations of Direct Material Usage Variances
The business has more experienced labour which results in less waste.
The business has installed more efficient production machines resulting in less waste.
The business has less experienced labour resulting in more waste.
Faulty machinery produced a higher number of faulty products on the production line.
Worked Example Question
A company manufactures frozen pies and requires an input of mince. The company expects the mince to cost $10/kg and to use around 5000 kgs per year, however, they actually used 6000 kgs of mince at an actual price of $15/kg.
Q: Calculate the Direct Material Quantity Variance.
= DMUV = (Actual Quantity of Direct Materials Used - Budgeted Quantity of Direct Materials Used) * Standard Cost of Direct Material
= (6000 - 5000) * $10 (Note: It is always the budgeted cost per unit used for quantity variance)
= (1000) * $10
= $10,000 is positive, hence the variance is unfavourable.
= $10,000 unfavourable
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