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4.2. An Illustration of Direct Material Variance Calculations

Blue Rail Manufacturing produces high quality handrails, gates, banisters, corral systems, and similar welded steel products. The primary raw material is 40 foot long pieces of heavy gauge steel pipe. This pipe is custom cut and welded into rails like that shown in the accompanying picture. In addition, the final stages of production require some grinding and sanding operations, along with a final spray coating of paint (welding rods, grinding disks, and paint are relatively inexpensive and are classified as indirect material components within factory overhead).

Blue Rail measures their output in "sections." Each section consists of one post and four rails. The sections are 10' in length and the posts average 4' each. Some overage and waste is expected due to the need for an extra post at the end of a set of sections, taller than normal posts, faulty welds, bad pipe cuts, and defective pipe. The company has adopted an achievable standard of 1.25 pieces of raw pipe (50') per section of rail.

During August, Blue Rail produced 3,400 sections of railing. It was anticipated that pipe would cost $80 per 40' piece. Standard material cost for this level of output is computed as follows:

Standard material cost for this level of output is computed as follows:

The production manager was very disappointed to receive the monthly performance report that revealed actual material cost of $369,000. A closer examination of the actual cost of materials revealed the following:

A closer examination of the actual cost of materials revealed the following:

The total direct material variance was unfavorable $29,000 ($340,000 vs. $369,000). However, this unfavorable outcome was driven by higher prices for raw material, not waste. It seems that steel prices escalated rapidly. The unfavorable materials price variance is calculated as follows:

MATERIALS PRICE VARIANCE = (SP - AP) x AQ = ($80 - $90) x 4,100 = <$41,000>

Materials usage was favorable since less material was used (4,100 pieces of pipe) than was standard (4,250 pieces of pipe). This resulted in a favorable materials quantity variance:

MATERIALS QUANTITY VARIANCE = (SQ - AQ) x SP = (4,250 - 4,100) x $80 =$12,000

These two variances net (<$41,000> + $12,000) to produce the total $29,000 unfavorable outcome:

4.3. Journal Entries for Direct Material Variances

A company may desire to adapt their general ledger accounting system to capture and report variances. Let's see how this might occur for Blue Rail. First, do not ever lose sight of the very simple fact that the amount of money to account for is still the money that was actually spent ($369,000). To the extent the price paid for materials differs from standard, the variance is debited (unfavorable) or credited (favorable) to a Materials Price Variance account. This results in the Raw Materials Inventory account carrying only the standard price of materials, no matter the price paid:


Raw Materials Inventory


Materials Price Variance


Accounts Payable


To record purchase of raw materials at standard price and related unfavorable variance

Work in Process is debited for the standard cost of the standard quantity that should be used for the productive output achieved, no matter how much is actually used. Any difference between standard and actual raw material usage is debited (unfavorable) or credited (favorable) to the Materials Quantity Variance account:


Work in Process Inventory


Raw Materials Inventory


Materials Quantity Variance


To transfer raw materials to production at standard usage rates and related favorable

quantity variance

The Materials Price Variances and Materials Quantity Variances are generally reported by decreasing income (if unfavorable debits) or increasing income (if favorable credits), although other outcomes are possible (alternative dispositions are discussed in more advanced managerial accounting courses).

Examine the following diagram to be sure you understand how these entries play out in the ledger - the first entry is in green and the second is in blue. As you examine this diagram, notice that the $369,000 of cost is ultimately attributed to work in process inventory ($340,000 debit at standard cost/quantity), materials price variance ($41,000 debit), and materials quantity variance ($12,000 credit):

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