Why is the direct materials price variance based on the quantity of materials purchased, but the direct materials quantity variance on the quantity of materials used?
A)Managers need to isolate variances and take corrective action as soon as possible.
B)Production managers are only interested in the quantity purchased.
C)The quantity used in production is not known until units are produced.
D)Managers are required by GAAP to isolate the price variance at the latest point possible.

Question

Quizplus · Accepted Answer

The direct materials price variance is based on the quantity of materials purchased because it measures the difference between the actual cost of materials purchased and the expected cost of those materials based on the standard price. This variance can be isolated and corrected as soon as possible to avoid future cost overruns. On the other hand, the direct materials quantity variance is based on the quantity of materials used in production because it measures the difference between the materials actually used and the standard quantity allowed for the units produced. This variance can only be calculated once the units are produced and the quantity used is known. By isolating both variances, managers can more easily identify the source of any cost overruns and take corrective action.

Why Is the Direct Materials Price Variance Based on the Quantity