Direct material usage variance

The direct material usage variance is the difference between the actual and expected unit quantity needed to manufacture a product. The variance is used in a standard costing system, usually in conjunction with the purchase price variance. These variances are useful for identifying and correcting anomalies in the production and procurement systems, especially when there is a rapid feedback loop.

Standards for raw materials are typically set by the engineering department and recorded in a bill of materials for each product.

The direct material usage variance is most commonly used in a production environment, but can also be used in a services business where hours worked can be compared to a budgeted level.

The calculation of this variance is:

(Actual usage - Standard usage) x Standard cost per unit

For example, ABC International expects to use five yards of thread in its production of a tent, but actually uses seven yards. This results in an unfavorable direct material usage variance of two yards of thread.

A usage variance can arise from any of the following issues:

  • An incorrect standard against which actual usage is measured
  • Not changing the bill of materials after a production process or product design has been altered that should have resulted in a change in the amount of materials usage
  • Problems in the production process that cause more than the normal amount of scrap
  • Problems with the quality of the raw materials purchased (or damage in transit), resulting in more units of raw materials being needed than usual

In a larger manufacturing operation, it is best to calculate this variance at the individual product level, since it reveals little actionable information at an aggregate level. The resulting information is used by the production manager and purchasing manager to investigate and correct problems.

Related Courses

Cost Accounting Fundamentals