In: Accounting
For this assignment you are to assume that you are the production supervisor for a plant that manufactures picture frames. The July variance report shows a large unfavorable material quantity variance. The new plant manager has asked you for an explanation of this variance by answering the following questions.
1. Explain the components of the total material variance.
2. Is it possible that price had an impact on the unfavorable quantity variance? Explain.
3. Is it possible that labor had an impact on the unfavorable quantity variance? Explain.
In variance analysis (accounting) direct material total variance is the difference between the actual cost of actual number of units produced and its budgeted cost in terms of material.
Material Cost Variance Formula = Standard Cost – Actual Cost
Direct material total variance can be divided into two components:
Direct material price variance is the difference between the standard cost and the actual cost for the actual quantity of material purchased.
MPV = (Standard Price – Actual Price) x Actual Quantity
Direct material usage (efficiency, quantity) variance is the difference between the standard quantity of materials that should have been used for the number of units actually produced, and the actual quantity of materials used, valued at the standard cost per unit of material.
MUV = (Standard Quantity – Actual Quantity) x Standard Price
2. Is it possible that price had an impact on the unfavourable quantity variance? Explain.
An unfavourable materials quantity variance means excessive use of direct materials. The excessive use of direct materials may be the result of a number of reasons including:
Responsibility of direct materials quantity variance:
It is the responsibility of production manager to keep a check on excessive use of materials. However if purchase manager purchases low quality materials to improve the direct materials price variance then purchasing department would be considered responsible for the variance.
Hence, as above if low price material purchased then we will get unfavourable Quantity Variance
3. Is it possible that labour had an impact on the unfavourable quantity variance? Explain.
An unfavourable materials quantity variance means excessive use of direct materials. The excessive use of direct materials may be the result of a number of reasons including:
Hence, as above labour had an impact on the unfavourable Quantity Variance.