All 38 Variance Analysis questions
More in Variance Analysis
What is a standard costing system? What does an adverse sales price variance indicate? What is a favorable variance a warning sign of sometimes? What is the difference between a budget and a standard? What are the two components of the direct labor variance? How is the variable overhead variance analyzed? What are the sales variances (price and volume)? How do variances reconcile budgeted profit to actual profit (an operating statement)? How do you decide which variances to investigate? What are the possible causes of an adverse material usage variance?
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Budgeting & Forecasting › Variance Analysis

What are the two components of the direct materials variance?

Intermediate

Answer

The total direct materials variance splits into the materials price variance—(standard price - actual price) x actual quantity purchased/used—and the materials usage (quantity) variance—(standard quantity for actual output - actual quantity) x standard price. Price reflects buying, usage reflects consumption efficiency.
Price = (SP - AP) x AQ.  Usage = (SQ - AQ) x SP.
Real-world example Buying cheaper material gives a favorable price variance; wasting material gives an adverse usage variance.

Common follow-ups: Which variance reflects purchasing? | Which reflects efficiency of use?

Variance Analysis Flexible Budgets Variance Analysis
All 38 Variance Analysis questions