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  • 1.  DIRECT MATERIAL VARIANCE HELP

    Posted 05-23-2022 02:07 PM
    I Want to understand why they didn't use the 150,000 as the standard quantity

    A company established its annual direct material budget to produce 300,000 units as follows.

    150,000 pounds of material at $0.75 per pound = $112,500

    Throughout the year, the company produced 310,000 units of finished goods using 0.48 pounds per unit at a cost of $0.76 per pound. The direct material efficiency variance is
    Answer (B) is correct.
    The direct material efficiency variance equals the standard quantity minus the actual quantity, times standard price. For a production level of 310,000, the direct materials needed equals 155,000 pounds [310,000 × (150,000 ÷ 300,000)], and materials actually used was 148,800 pounds (310,000 × 0.48). Thus, the variance is $4,650 favorable {SP × (AQ – SQ) = [$0.75 × (148,800 – 155,000)]}.


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    Tayba Al-Mehdar
    Controller
    Khobar
    Saudi Arabia
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  • 2.  RE: DIRECT MATERIAL VARIANCE HELP

    Posted 05-24-2022 01:05 AM
    For the budget, the company plans to produce 300,000 units and consume 150,000 lbs. Therefore, the material budget is 0.5lb/unit. During the year, the company actually produces 310,000 units, so the standard material quantity is 0.5 * 310,000 = 155,000 lbs. Hope this help.

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    Duc Truong
    Accountant
    Westminster CA
    United States
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  • 3.  RE: DIRECT MATERIAL VARIANCE HELP

    Posted 05-24-2022 02:31 AM
    150,000 pounds is the standard quantity for 300,000 units, but the actual output is 310,000 units so accordingly for this level of output 155,000 pounds should have been used so 155000 is taken as SQ

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    Omkar Pawar
    student
    KALYAN MH
    India
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  • 4.  RE: DIRECT MATERIAL VARIANCE HELP

    Posted 05-24-2022 04:30 AM
    Hi Tayba,

    There are 2 costs given in the problem,

    1. Standard Cost (budget)
    2. Actual Cost

    As per Std cost / budget = Units  produced were considered 300000
    to make those 300000 units 150000 pounds were used which means 0.50 pounds were used for every unit produced which cost them $0.75 for each pound

    But
    Actual Qty produced were 310000 units which required 0.48 pounds per unit @ $0.76 per pound

    In order to get the variance correct, we need to flex the budget as we cannot compare the standard budget or cost with the actual. If we try doing that we will not be justifying the cost.

    Hence, to flex the budget, we use 310000 actual units produced and multiply that with the Std costs.

    Since 310000 units were produced, as per 0.50 per pound std cost, we should have used 155000 pounds to make them,

    however, we used 310000 x 0.48 pounds = 148800 pounds to produce 310000 units
    hence, DM efficiency variance = ( SQ - AQ )​ x SP = ( 155000 - 148800 ) x 0.75 = 6200 x 0.75 = $4650 favorable since we used less materials per pound then budgeted.

    Hope that clarifies your question.

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    Jay Chowdhury
    Mumbai India
    jaychwdhry@...
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  • 5.  RE: DIRECT MATERIAL VARIANCE HELP

    Posted 05-24-2022 06:11 AM
    150000 is standard quantity for producing 300000 units we need standard quantity to produce 310000 units

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    BUNYAMIN P A (no Last Name)
    Student
    CHAVAKKAD
    India
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  • 6.  RE: DIRECT MATERIAL VARIANCE HELP

    Posted 05-24-2022 02:45 PM
    Hi Tayba,

    Budget:
    300,000 units of finished goods.
    product unit need 150,000 pounds of material as total = 150,000/300,000= 0.50 material per unit (Budget)

    Actual:
    310,000 units of finished goods = 0.48  material per unit (Actual)
    310,000 * 0.48 = 148,800 (actual material as total)

    to calculate t he efficiency variance :
    {(Actual finished goods units* standard material per unit) - (Actual finished goods units * actual material per unit)} * standard price=
    {(310,000 * 0.50) - (310,000* 0.48)} * 0.75=
    {(155,000 - 148,800)} * 0.75=
    6200 * 0.75= 4,650

    Why 4,650 is favorable?
    because the actual material per unit is less than the standard material per unit.
    0.48 is less than 0.50 or 148,800 is less that 155,000
    and therefore, there is  some savings regarding the actual material than the planned budget material.

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    Ahmed Zolfakar
    Director/Manager
    Giza
    Egypt
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