A company reports the following for one of its products. Direct materials standard (4 pounds @ $2 per pound) Actual direct materials used (AQ) Actual units produced Actual cost of direct materials used AQ Actual Quantity SQ = Standard Quantity AP = Actual Price SP Standard Price Compute the direct materials price and quantity variances and identify each as favorable or unfavorable. Actual Cost $ 8 per unit 340,000 pounds 72,000 units $ 612,000 X Standard Cost X
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
DIRECT MATERIAL COST VARIANCE
Direct Material Cost Variance is the Difference between the Actual Direct Material Cost Incurred and the Standard Direct Material cost specified for the Production Achieved.
Classification of Direct Material Cost Variance is :—
- Direct Material Price Variance
- Direct Material Usage Variance
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