Chapter 7 • Know and understand how to calculate the direct materials price vari
ID: 2467398 • Letter: C
Question
Chapter 7 • Know and understand how to calculate the direct materials price variance (Learn the formula and know how to apply it – pgs. 283-284) • Know and understand how to calculate the direct materials quantity variance (Learn the formula and know how to apply it – pgs. 283-284) • Know and understand if the actual quantity of direct materials used in producing a commodity differs from the standard quantity, what type of variance is it • Know and understand if the price paid per unit differs from the standard price per unit for direct materials, what type of variance is it • Know and understand if the wage rate paid per hour differs from the standard wage rate per hour for direct labor, what type of variance is it • Know and understand if the actual direct labor hours spent producing a commodity differs from the standard hours, what type of variance is it
Explanation / Answer
Direct material price variance is the difference between standard price for actual quantity of direct material used and the actual direct material cost incurred. If standard price for actual quantity of direct material used is more than the actual direct material cost incurred then resulted to favorable variance. If actual direct material cost is more than standard cost for actual quantity used for production then it results into adverse variance.
Direct material quantity variance is the difference between standard quantity of direct material and the actual quantity of direct material used for production. Direct material quantity variance is calculated as under:
Standard Price per unit of direct material×[(Std. Qty of Direct Material allowed-Actual Qty of Direct Material used)]
If actual quantity of direct material differs with the standard quantity of direct material then it results in direct material quantity variance.
If the price paid per unit from the standard price per unit for direct materials then it results in direct material price variance.
If the wage rate paid per hour differs from the standard wage rate per hour for direct labor then the direct labor rate variance. This variance shows the difference between the standard wage rate and the actual labor rate paid. If the standard wage rate is more than actual wage rate paid then it results into favorable variance and if the standard wage rate is less than the actual wage rate then it results into adverse variance.
If there is a difference between standard direct labor hours and the actual direct labor hours spent for production then the direct labor efficiency variance incurs.