Quiz 12: Standard Costs: Direct Labor and Materials

Business

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Material Variance helps us in analyzing how much more or less cost has been incurred as compared to the standard cost. In other words, it is the difference between the cost incurred on the material actually used and cost that should have been incurred on the material that should have been used.Calculation of Material Variance involves two further steps: 1. Calculation of Price Variance 2. Calculation of Quantity Variance Price Variance is the difference between the price at which actual quantity should have been bought (standard price) and the price at which the quantity is actually bought (actual price). Quantity Variance is the difference quantity that should have been used for production (Standard Quantity) and quantity that was actually used for production (Actual Quantity) for the standard price. Using the above two variances, the material variance can be calculated.a.Calculate material variance as follows: img img img As quantity variance is unfavorable it has been subtracted from Price Variance. img b.The $120 favorable price variance indicates that by purchasing the tube at $3.90 which is below its standard cost of $4, firm was able to save $120. However, 100 inches extra were used and this cost firm $400. The possible reason for $400 U is that substandard quantity tubing was acquired and therefore more waste occurred (was unable to maintain quality norms).

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