In variance analysis, the direct materials variance may be split into two: price variance and quantity variance. The direct materials quantity variance refers to the variance that arises from the difference in the expected and actual quantity of materials used in production.
The formula for direct materials quantity variance is:
DM quantity variance = (AQ - SQ) x SP
where: AQ = actual quantity, SQ = standard quantity, and SP = standard price.
Example: Based on market quotes, XYZ Company has established a standard price of $5 per kilogram of raw material. Each unit of its product requires 2 kgs. Last month, XYZ used 20,000 kgs. of raw material costing $105,000 to produce 9,600 units. Compute for the direct materials quantity variance.
| DM quantity variance | = | (AQ - SQ) x SP |
| = | (20,000 - 19,200) x $5 | |
| DM quantity variance | = | $4,000 unfavorable |
The standard quantity of 19,200 is computed by multiplying the standard quantity per unit of 2kgs. by the number of units actually produced (9,600 units). It means that following the standard quantity, the company should have used 19,200 kgs. for its actual output.
If the actual quantity used is less than the standard quantity, the variance is favorable since the company was able to save on materials. It suggests that the workers were efficient in using raw materials. However, a favorable variance could have a different implication. Decreased usage might indicate that the production department is producing lower quality products as a result of trying to reduce the total cost of materials.
If the actual quantity used is greater than the standard quantity, the variance is unfavorable. This means that the company has used excessive materials in producing its output. The excessive use of materials may be due to several reasons. It could indicate that the company is using low-quality materials (possibly indicated by a favorable direct materials price variance), or use of less-skilled workers to reduce labor costs (resulting in a favorable direct labor rate variance).
In general, the production department of the company is responsible for direct materials quantity variance since it has direct control over the usage of materials. However, other departments may also be accountable if they cause indirect influence to such variance (e.g. low-quality materials acquired by the purchasing department).
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