Direct Material Variance

A direct material variance analysis focuses on the difference between actual and budgeted direct material expenses. Fundamentally, direct material variances are due to unplanned differences in the cost and quantity of units purchased. Beyond this, the direct material quantity variance can be broken down further to determine the impact of changes in mix and yield.

BENEFITS OF A DIRECT MATERIAL VARIANCE ANALYSIS

A direct material variance analysis provides valuable insight as to why your company fell short of or exceeded direct material cost expectations. This insight allows your organization to make timely adjustments in light of changing circumstances and facilitates more accurate future planning.

THE DIRECT MATERIAL VARIANCE ANALYSIS PROCESS

Compile budgeted and actual cost and quantity information
Calculate the direct material price and quantity variances
Break the direct material quantity variance down into its mix and yield components
Review the results for abnormalities
Investigate the abnormalities, if they exist

FURTHER READING

These links elaborate on the topic at hand. They serve as a good starting point for those companies that would like to learn more or would like to address these topics “in house.” For those firms that prefer to continue to focus on their current responsibilities and would value the objective viewpoint of a professional from outside of the organization, click here.

CHAPTER 6: COST VARIANCES FOR DIRECT MATERIALS AND LABOR
Excerpt: “The following table shows the price and quantity variances graphically, when both variances are negative. The area of the yellow box represents the flexible budget. The area of the “outer” box (the union of the three colored boxes) represents the actual amount incurred…”

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