Definition:
Direct Material Usage Variance measures efficiency in material or material consumption by comparing standard material used for production units with actual material usage or consumption.
This variance calculation is essential for management to assess if the current production system is running effectively or not.
Negative variance generally means production is not run effectively, and positive variance is normally favorable for management.
The direct material usage variance may be divided into mix and yield variances if several materials are mixed in standard proportions.
Formula:
Direct Material Usage Variance:
= Standard Price (Actual Quantity – Standard Quantity)
Or
= Standard Costs of Actual Quantity – Standard Costs of Standard Quantity
- The standard price is the price set for a specific product or material at the beginning of the planning/budgeting stage.
Explanation:
Under costing, production and inventories are recorded at the standard cost. The standard quantity of direct materials used to make the products is recorded at standard cost.
If a manufacturer uses more direct materials than the standard quantity of materials for the products manufactured, the company will have adverse direct materials usage variance.
The company shall have favorable materials usage variance if the quantity of direct materials used exceeds the standard quantity of products manufactured.
The favorable and adverse variances shall be recorded in a general ledger account.
Analysis:
Favorable usage variance suggests efficient utilization of material resources by the production manager. The various reasons for favorable material usage variance are as follows:
- Use automated tools and constantly improve algorithms and intelligence of these AI tools to manufacture or produce.
- Purchase of materials of higher quality than the standard. This is also reflected in adverse material price variance.
- Efficient utilization of labor skills
- Training and development of manufacturing workers and increasing their productivity
On the other hand, Adverse Usage variance suggests higher consumption of material compared with the standard used during the period in question.
This is the production manager’s responsibility, and he shall be accounted for this adverse variance. The various reasons for adverse usage variance are as follows:
- Using humans in manufacturing rather than automated tools decreases efficiency and increases error.
- Ineffective use of skilled labor
- Purchase lower quality materials than the standard, which is also reflected in favorable material price variance.
- Increase in material wastage due to wear and tear in plant and machinery in the manufacturing process
Example:
Marvel Inc produced 10,000 items of idols from the Marvel franchise in November 2018.
Following raw materials were purchased and consumed by Marvels Inc during the period:
| Material | Quantity Used | Standard Usage per item | Actual Price | Standard Price |
| Cloth | 100 kgs | 11 kg | $ 75 per kg | $ 70 per kg |
| Paint | 150 kgs | 14 kg | $ 21 per kg | $ 20 per kg |
| Clay | 250 kgs | 26 kg | $ 11 per kg | $ 10 per kg |
Direct Material Usage variance shall be calculated as:
We calculate the standard quantity
| Cloth | 10,000 * 11/1000 | 110 kgs |
| Paint | 10,000 * 14/1000 | 140 kgs |
| Clay | 10000 * 26/1000 | 260 kgs |
Now we calculate the variances as:
Material Price Variance = Standard Price (Actual Quantity – Standard Quantity)
| Cloth | 70 (100-110) | $ 700 Favorable |
| Paint | 20 ( 150 – 140 ) | $ 200 Adverse |
| Clay | 10 (250 – 260) | $ 100 Favorable |
Adding all the variances together,
Direct Material Usage Variance = $600 Favorable