Direct Materials Usage Variance

The direct materials usage variance is a standard costing measure that shows whether production used more or less material than it should have for the output actually achieved. It is calculated as the difference between the actual quantity of direct materials used and the standard quantity allowed, multiplied by the standard price per unit. Pricing the difference at standard isolates the effect of waste or savings from any change in what the materials cost.

It is the quantity half of the total direct materials variance, alongside the direct materials price variance. It is also called the materials quantity variance or materials efficiency variance, and it is the materials counterpart of the direct labor efficiency variance.

A tailor plans to use two meters of fabric for each jacket. If a batch of 50 jackets uses 108 meters, eight meters went somewhere they should not have: cutting mistakes, flawed cloth or a pattern that wastes material. The usage variance values those extra eight meters at the planned fabric price.

If the batch used only 96 meters, the tailor saved material and the variance would be favorable. By ignoring what was actually paid for the fabric, the measure focuses attention on the workroom, where the material is cut and used.

The variance is calculated as:

• $\text{AQ}$ is the actual quantity of material used in production.
• $\text{SQ}$ is the standard quantity allowed for actual output: units produced times the standard quantity per unit.
• $\text{SP}$ is the standard price per unit of material.

A manufacturer's standard is 3 pounds of resin per unit at $4.00 a pound. In June it produces 2,000 units, so the standard quantity allowed is 6,000 pounds. Production actually uses 6,300 pounds. The usage variance is $(6{,}300 - 6{,}000) \times 4.00 = 1{,}200$, an unfavorable variance of $1,200. If only 5,850 pounds had been used, the variance would be $600 favorable.

In a standard cost system, materials are issued to production at standard price, and Work-in-Process Inventory is charged with the standard quantity at standard price. For June the entry is:

• Debit Work-in-Process Inventory $24,000 (6,000 pounds times $4.00).
• Debit Direct Materials Usage Variance $1,200.
• Credit Raw Materials Inventory $25,200 (6,300 pounds times $4.00).

Because the raw materials account is already kept at standard price, no price element appears in this entry; any price difference was isolated when the materials were bought. A favorable variance would be credited. At period-end, small variances are usually closed to cost of goods sold.

• Waste and spoilage. Cutting errors, machine misalignment and damaged units consume extra material.
• Material quality. Lower-grade materials may contain more defects, so more must be used to produce good output.
• Worker skill. Inexperienced staff typically use more material than trained ones.
• Theft or poor record-keeping. Missing material shows up as apparent over-use if requisitions are not controlled.
• Product or process changes. A redesign or new equipment can change the true quantity needed before the standard is updated.

The production manager is normally responsible, though causes often lie elsewhere. When purchasing buys cheaper, poorer material, the result may be a favorable price variance and an unfavorable usage variance at the same time. In the example above, the $1,400 favorable price variance on resin is partly offset by the $1,200 unfavorable usage variance, and managers would want to know whether the cheaper resin caused the extra waste.

Usage variances depend on accurate standards, which are usually based on engineering studies plus an allowance for normal waste. If the allowance is unrealistic, the variance will be consistently unfavorable or favorable without telling managers anything new. The variance also reports results after the fact; many companies track scrap and yield daily on the shop floor so they can respond faster than a monthly report allows. It is a key tool of management accounting, but best used alongside physical measures of yield and quality.

• Institute of Management Accountants