Direct Material Usage Variance
Direct material usage variance is the difference between actual material usage and the budgeted material. The company has the standard cost of material used per unit, so the budget material equal to number of actual unit multiply by standard cost. However, the result maybe different from the plan. The variance depends on how accurate we calculate the standard cost and waste control during production.
The variance can be both favorable and unfavorable, where the actual can be higher or lower than the expected cost. Favorable when the actual material used is less than standard while unfavorable is the other way around. The company must be investigated when the variance is significant and impact management decisions. It is normal to have variance but the should not be too big which can impact net profit.
Favorable variance has positive impact on profit, but it means that company expect higher cost, so it leads to higher price. Company lose competitive advantage over pricing when setting too high price. Unfavorable variance will decrease profit or even lead to unexpected loss.
Material Usage Variance Formula
Material Usage Variance Example
Company A manufacture the shoes, it has to calculate the standard cost the following:
- Calculate the actual cost
During the year, the company produces 20,000 units and the actual usage as follows:
2. Calculate the standard cost
The standard cost for 20,000 units as following:
3. Calculate the variance
The total price variance during January is negative $ 500 ($ 1,000 – $ 300 – $ 200), and it will impact the cost of goods sold in the statement of profit and lose. It will reduce the cost of goods sold and increase net income for the period.
The favorable variance may raise from the following:
- The standard quantity is not prepared properly, the manager may wish to increase it in order to protect himself when something go wrong.
- The work is more efficient than expected.
- The wastage may decrease after the workers’ learning curve improve.
The unfavorable (adverse) variance may arise from:
- The standard quantity is not prepared properly. The manager may under pressure from competitive price and he keep reduce the cost until it is impossible to archive.
- The purchasing department buys low-quality material which leads to high wastage and error.
- The old machine produce more errors and high variance. The scrap will increase as well if we keep using the old machine.
Cause of Material Usage Variance
Before finding solutions, we need to understand the causes of this variance which include:
- Inappropriate use of direct material: management should conduct the investigation whether the variance due to staff negligence during production.
- Unskill worker: if the majority of the workers are new and do not receive proper training.
- Defective process: this is a serious issue which means the production process is improper and it causes significant wastage.
- Thief: There may be unauthorized persons who go into the factory and steal material.
- Material quality: The poor material quality will increase the wastage as well.
- Defective machinery: The old machinery may not work well and it will increase defective products which will end up as the wastage.
- Lack of inspection: Without a proper inspection, worker will be careless during the work and it can lead to defective products.
- Error in recording: There may be some error in the recording which shows unusual variance.
How to Reduce Material Usage Variance (unfavorable)?
|Reduce Material Usage Variance
|The workers need to receive proper training to make sure they can perform the work properly. Unskill workers will increase the wastage and make more errors, so we need to provide more training.
|Error in the production process
|The production process may have some issue which increases the error. We may need to check with the engineering and design team if the process flow works correctly.
|Low quality will increase the rate of production failure and wastage. So the purchasing department should follow the quality standards in order to prevent this issue.
|The wastage needs to keep at a reasonable rate. Any factor which increases the wastage, the management needs to find the solution.