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Introduction to Management
Accounting

Functions of Management
Accounting

Management Accounting Concepts

Opportunity Cost

Introduction to Variance Analysis

Direct Material Price Variance

D ire c t Ma te ria l U s a g e
V a ria nc e

Direct Material Mix Variance

Direct Material Yield Variance

Direct Labor Rate Variance

Direct Labor Efficiency Variance

Direct Labor Idle Time Variance

Sales Price Variance

Sales Volume Variance

Sales Mix Variance

Sales Quantity Variance
Variable Overhead Spending
Variance
 Variable Overhead Efficiency
Variance

Fixed Overhead Total Variance

Fixed Overhead Spending Variance

Fixed Overhead Volume Capacity &

Efficiency Variance

Limitations of Standard Costing &

Variance Analysis

Relevant Cost and Decision Making

Relevant Cost of Labor

Relevant Cost of Materials

Limiting Factor Analysis

Single Limiting Factor Analysis

Linear Programming
Graphical Method
Graphical Method Example

Equation Method

Budgeting

High Low Method

Investment Appraisal

Time Value of Money

Accounting Rate of Return Direct Material Usage Variance

Internal Rate of Return
Definition
Modified Internal Rate of Return
Direct Material Usage Variance is the measure of difference between the actual quantity of material utilized during a period and
Payback Period the standard consumption of material for the level of output achieved.
Discounted Payback Period

1. Definition
 2. Formula

3. Example

4. Analysis

5. MCQ

Formula
Direct Material Usage Variance:

= Actual Quantity x Standard Price - Standard Quantity x Standard Price

= Standard Cost of Actual Quantity - Standard Cost of Standard Quantity

= (Actual Quantity - Standard Quantity) x Standard Price

Since the effect of any variation in material price from the standard is calculated in the material price variance, material usage
variance is calculated using the standard price.

Example
Cement PLC manufactured 10,000 bags of cement during the month of January. Consumption of raw materials during the
period was as follows:

Standard Usage Per

Material Quantity Used Actual Price Standard Price
Bag

Limestone 100 tons 11 KG $75/ton $70/ton

Clay 150 tons 14 KG $21/ton $20/ton
Sand 250 tons 26 KG $11/ton $10/ton

Material Usage Variance will be calculated as follows:

Step 1: Calculate Standard Quantity

Limestone: 10,000 units x 11 / 1000 = 110 tons
Clay: 10,000 units x 14 / 1000 = 140 tons
 Sand: 10,000 units x 26 / 1000 = 260 tons

Step 2: Calculate the Variance

Material Usage Variance = [Actual Quantity - Standard Quantity (Step 2)] x Standard Price

Limestone: (100 - 110) x $70 = ($700) Favorable

Clay: (150 - 140) x $20 = $200 Adverse
Sand: (250 - 260) x $10 = ($100) Favorable
Total Usage Variance ($600) Favorable

Note: Actual price paid for the acquisition of materials shall be ignored since the variation between standard price is
already accounted for in the material price variance.

Analysis
A favorable material usage variance suggests efficient utilization of materials.

Reasons for a favorable material usage variance may include:

Purchase of materials of higher quality than the standard (this will be reflected in adverse material price variance)
Greater use of skilled labor
Training and development of workforce to improve productivity
Use and improvement of automated manufacturing tools and processes

An adverse material usage variance indicates higher consumption of material during the period as compared with the standard
usage.

Reasons for adverse material usage variance include:

Purchase of materials of lower quality than the standard (this will be reflected in a favorable material price variance)
Use of unskilled labor
Increase in material wastage due to depreciation of plant and equipment
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Test Your Understanding
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Fresh PLC is a manufacturer of toothpaste. One of the ingredients
of Fresh Toothpaste is sodium fluoride powder. Fresh PLC
purchased 10,000 KG of sodium fluoride at the cost of $20,000 ($2
 per KG) out of which it utilized 9,000 KG during the period.

Further information includes the following:

-Standard price of sodium fluoride is $1.5 per KG

-Standard usage of fluoride is 10 grams per toothpaste
-Fresh PLC manufactured 1 million toothpastes during the period 8
Like
What is the material usage variance?
4 222
Zero

-$1,500 Favorable

-$1,500 Adverse 58.3K 4

-$2,000 Adverse

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Direct Material Mix Variance
-50% -30%

-10%
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4 Comments Accounting-Simplified.com 
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Qwequ Kakra • a year ago

how can i reference information retrieved here
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AccountingSimplified Mod > Qwequ Kakra • a year ago

Hi. You may reference information from this website as follows:

Ammar Ali, Abdul Majid. (2010). "Insert Page Title of the article". Available: accounting-
simplified.com. Last accessed "Insert the date on which the article is accessed".
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Swapan Baksi • 3 years ago

Where is the 1000 coming from in the calculations for standard quantity for limestone, clay and sand?
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AccountingSimplified Mod > Swapan Baksi • 3 years ago

1000 is the conversion factor used to convert Kilograms into equivalent units of Tons. 1000 KG
equals 1 Metric Ton.
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