Chapter 9, Problem 7.1GBP

To determine

Concept introduction:

Direct material variances:

Direct material variances refer to the difference between the standard direct material cost and actual direct material cost incurred. Direct material cost variances are categorized into following two categories:

1. Direct material Rate variance: this variance shows the difference of standard rate and actual rate of material. The formula to calculate this variance is as follows:

$\text{Direct material rate variance = }\left(\text{Actual rate – Standard rate}\right)\times \text{Actual Quantity}$

2. Direct material usage variance: this variance shows the difference of standard usage and actual usage of material. The formula to calculate this variance is as follows:

$\text{Direct material usage variance = }\left(\text{Actual Quantity – Standard Quantity}\right)\times \text{Standard rate}$

3. Direct material cost or spending variance: this variance shows the difference of standard cost and actual cost of material. The formula to calculate this variance is as follows:

$\text{Direct material cost variance = Direct material rate variance + Direct material usage variance}$

To indicate:

The journal entry for Direct Material Cost and related variances.