This chapter covers direct material variance analysis that enables managers to identify if a direct material variance exists, and if so, if is it caused by the cost of each raw material unit purchased or by the quantity of materials used in production. Identifying which material variances need investigation and with whom the responsibility of the variance lies is also addressed. Like with direct labor variances, material variance analysis is performed at the end of an accounting period at the earliest point that the actual costs are known.


Direct Material Variance Analysis

A material price standard is the amount that is allowed to be paid for each unit of raw material. The unit concept is extremely important in this variance---it will always be based on the unit in which the company uses its materials. This measure can be denominated in pounds, ounces, square feet, linear board feet, tons, etc. A similar matrix format to that used for direct labor, also developed by the late Dr. Charles Horngren, and is used to demonstrate variance analysis. The alphabetical characters used in the matrix correlate to the following:

P = Price

Q = Quantity

A = Actual

Ap = Actual quantity purchased

Au = Actual quantity used

S = Standard

The matrix displays two rows labeled with the letters 'P' and 'Q'. Just as with labor variances, amounts in the first row will contain only price amounts of materials, and the second row will contain only quantities of materials.


Amounts Appearing in the Price (P) Row

The amount to be indicated for 'A' in the 'P' row is the actual price of material for the quantity in which the material is purchased (such as price per pound). The amount to be placed in the space occupied by all three of the 'S' letters in this row is the standard price per unit of material (such as price per pound).


Amounts Appearing in the Quantity (Q Row

The first two columns in the "Q' row designated as (Ap) are used to write the actual quantity of materials purchased. The third column will display the actual (Au) quantity of materials used. The final column total represents the flexible budget cost for materials. The amount for 'S' in the quantity row will be the quantity of materials allowed for each unit of product actually produced. 



The amounts in each of the four columns are multiplied down to arrive at a separate total for each column. The totals of the first and second columns are compared and the difference is the material price variance. The totals of the third and fourth columns are compared and the difference is labeled as the material quantity variance. To determine the total materials variance, combine the materials price variance with the materials quantity variance. There is no variance for the difference between columns 2 and 3.


Determining if a Variance is Favorable and Unfavorable

Favorable variances occur when actual costs are less than expected. Unfavorable variances occur when actual cost exceed expected costs. From a conceptual perspective, the following apply: 


Type of Variance Variance Occurs When
 Unfavorable material price variance   Actual price per material unit exceeds the standard price allowed per unit
 Favorable material price variance  Actual price per material unit is less than the standard price allowed per unit
 Unfavorable material quantity variance  Actual quantity of materials used exceeds the standard quantity allowed at the level of activity achieved
 Favorable material quantity variance  Actual quantity of materials used is less than the standard quantity allowed at the level of activity achieved


A material unit is the denomination in which materials are measured, such as yards, kilograms, ounces, board feet, etc.


From a mechanical perspective, when comparing the first two column totals, if the left column total is greater than the right total, the material price variance is unfavorable. If the left column is less than the right column total, the variance is favorable. Likewise, when comparing the third and fourth column totals, if the left column total is greater than the right total, the variance is unfavorable. If the left column total is smaller, the variance is favorable.


Isolating Material Price Variances Early

The material price variance is isolated at the earliest point in time at which the company is able to identify the purchase price. This is typically at the point in the materials are received. This gives the company time to make production or other changes if necessary. It enables the purchasing manager to make supplier changes or identify other purchasing problems. Management sometimes make changes in selling prices to cover increased material prices. Many companies have recently tried another tactic that involves reducing the quantity of materials used in production to offset the increased purchase prices. For example, suppose the cost of sugar used to make boxes of cake mixes increases by 10%. The company has two options. It can increase the selling price of the cake mixes or reduce the quantity of cake mix in each box.. This latter option is called product shrinkage and has been used on paper towels, boxed food products such as granola bars and macaroni and cheese, and other products to avoid increasing selling prices.

Interpreting Variances

Once variances are calculated, they must be interpreted. Assume for example that a company determined it had a $450 unfavorable material price variance. This variance indicates that the company paid more per material unit (such as pounds or square feet) than allowed in the budget. If the same variance was favorable, the company would have saved $450 by purchasing materials at a cheaper price per material unit.


An unfavorable material quantity variance of $220 indicates that the company incurred an extra cost of $220 by using more units of material in production than allowed in the budget. If the same variance was favorable, the company would have saved $220 by using fewer units of material than allowed in the budget.


Material prices fluctuate due to market changes and inflation effects. Supplier price lists are often not negotiable, so companies may not have an option on the cost of materials. Purchasing cheap materials may cause employees to use more material than allowed at the standard due to breakage or other defects It may also cause workers to spend more time producing products by having to handle more materials and rework products due to the material defects. Sometimes shoddy equipment maintenance causes wasted materials. Improper scheduling can often increase the price of materials if they must be shipped overnight with higher shipping costs.


Responsibility for Material Variances

Material Price Variance

Whose problem is it when a material price variance exists? The purchasing manager is responsible because he orders materials and negotiates prices from suppliers. He is sometimes able to change suppliers but often competitors have similar pricing. If a material price variance exists, the purchasing manager is consulted to try to determine the cause of the variance.


Material Quantity Variance

Whose problem is it when a material quantity variance exists? Because the production supervisor oversees the production workers, he is responsible for monitoring the use of materials. If a material quantity variance exists, the production supervisor is consulted to  determine the cause. However, if the purchasing manager purchased poor quality materials in order to obtain a cheaper price, the purchasing manager is responsible. Cheap materials often carry over to create unfavorable labor efficiency variances because the defective materials slow the production workers.


Walk Through Problem

Bateh Company produces hot sauce. It uses units as the cost driver for overhead. Bateh has a 1% materiality threshold. The following information was provided concerning its standard cost system for 2018:


Standard Data


Actual Data

Direct material

1/8 lb. @ $7.50 per lb.


Units of product produced


Direct labor

24 mins. @ $12 per hr.

Materials purchased

600 lbs. for $4,440

Budgeted fixed overhead


Materials used

556 pounds

Budgeted variable overhead

$4.50 per unit

Direct labor worked

1,610 hours totaling $19,481

Budgeted production in units


Overhead incurred

Fixed $20,000; Variable $28,400


Calculate all three direct material variances for Bateh Company. Determine which variances should be investigated and who is responsible for each.


Step 1: Draw a matrix by writing the letters of the first row across the page as: P-A-S-S-S. The letters of the second row are written as: Q-A-A-A-S.


Step 2: Write the actual price and standard price amounts on the first row. Because materials for this company are measured in pounds, the price is on a 'per pound' basis. The problem gives you the standard (S) price per pound of $7.50. The actual price per pound for direct materials must be calculated. Because the total cost of purchasing 600 pounds is $4,440, dividing the $4,440 cost by the 600 pounds arrives at the actual purchase price per pound is $7.40.


P A  S  S  S
 $7.40    $7.50    $7.50    $7.50
Q  A    A    A    S 

Step 3: Write in the quantities (Q) of pounds in the second row. You are given the actual quantity purchased, which is written in the first two columns as 600. The actual quantity of 556 pounds used is written in the third column of amounts. The flexible budget column on the far right represents the flexible budget amount that equals the company's flexible budget amount for direct materials. It is based on the actual number of units produced. The standard quantity allowed is 1/8 pound for each finished goods unit produced. Since 4,400 were produced, there will be 1/8 times 4,400 pounds, or 550 pounds of direct materials allowed.

P A  S  S    S
 $7.40    $7.50    $7.50       $7.50
Q  A    A    A    S 








Step 4: Multiply down and write the total below the underline for each of the four columns.

P   A     S    S    S

  $7.40    $7.50   $7.50      $7.50
Q  A    A    A    S 















Step 5: Determine the difference between the first and second column totals to arrive at the material price variance: $4,500 - $4,440 = $60. Since the left total (column 1) is less than the right total (column 2), the variance is favorable. Determine the difference between the third and fourth columns to arrive at the material quantity variance: $4,170 - $4,125 = $45. Because the left total (column 3) is greater than the right total (column 4), the variance is unfavorable. There is no variance between columns 2 and 3 because the difference represents inventory units that either have been purchased but not used, or used from the beginning inventory.

P A  S  S  S 
 $7.40    $7.50    $7.50    $7.50  
Q  A    A    A    S  
















  MPV    MQV  
   $  60 F    $   45 U 

Step 6: The total material variance is determined by combining the price and quantity material variances together. Because the favorable variance of $60 is greater than the unfavorable variance of $45, the total material variance is favorable in the amount of $15.


When both variances are favorable, they are added together and the total materials variance is favorable. When both variances are unfavorable, they are added together and the total materials variance is unfavorable. When one of the two variances is favorable and the other unfavorable, they are subtracted from each other, and the variance is labeled based on the status of the larger dollar amount of the two variances.


Step 7: Should these variances be investigated if the company has a 1% materiality threshold? First, determine the threshold dollar amount. The last column is the total flexible budget amount allowed and is used as the budget amount for this calculation.

            1% x $4,125 = $41.25

Step 8: Because both variances exceed the $41.25 amount, both should be investigated. Who is responsible for these variances? The production supervisor is responsible for the material quantity variance because he has control of monitoring employee usage of materials. The purchasing manager is responsible for material price variances because he is responsible for locating materials within the budget.

This page was last edited on Thursday April 02, 2015 05:32 PM
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