Direct Materials Quantity Variance

The direct materials quantity variance is one of the main standard costing variances, and results from the difference between the standard quantity and the actual quantity of material used by a business during production. Additionally the variance is sometimes referred to as the direct materials usage variance or the direct materials efficiency variance.

Together with the price variance the quantity variance forms part of the total direct materials variance.

The variance is calculated using the direct materials quantity variance formula, which takes the difference between the standard quantity and the actual quantity, and multiplies this by the standard price per unit of material.

Example of Direct Materials Quantity Variance

Suppose, for example, a manufacturer uses plastic sheets in the manufacture of a product. Additionally each sheet has a standard price of 4.00, and a standard requirement of 2.00 sheets per item manufactured.

Furthermore on a production run, they manufacture 500 items and find they have used 1,200 sheets of plastic. Accordingly the quantity variance is given as follows:

Direct materials quantity variance = (Standard quantity - Actual quantity) x Standard price.
Direct materials quantity variance = (500 x 2.00 - 1,200) x 4.00
Direct materials quantity variance = (1,000 - 1,200) x 4.00 = 800

Additionally this is summarized in the table below:

In this example, the variance is negative (unfavorable), as the actual quantity of sheet used (1,200) was higher than the standard quantity (1,000), and therefore it cost the business more to produce the 500 items than it should have done.

Variance Analysis Accounting Journals

The standard costing journal entries to transfer the materials to work in process and record the direct materials variance is as follows:

In the standard costing system, material costs are posted at the standard price. The actual quantity (1,200 sheets) of plastic is removed from the raw materials inventory at the standard price (4.00) giving a credit entry of 4,800 posted to the account. The standard quantity (1,000) which should have been used in production is transferred to work in process inventory at the standard price (4.00), giving a total debit entry of 4,000. The difference between the two postings is the variance of -800, which is posted to the direct materials variance account as a debit representing the unfavorable variance.

Clearing the Direct Materials Quantity Variance Account

The financial statements of the business must ultimately show the actual costs incurred by the business, and at the end of an accounting period, having investigated the direct material quantity variances using the variance report, the balance on the direct materials quantity variance account needs to be cleared using the rules discussed in our standard costing and variance analysis tutorial and are available for download in PDF format here. These rules can be summarized as follows:

1. For small, insignificant direct materials quantity variances it is not worth the time and effort apportioning the balance, so it is simply transferred to the cost of goods sold account.
2. Larger unfavorable variances (debit balances) which have resulted from errors and inefficiencies in the business, are also transferred to the cost of goods sold account, as apportioning them to an inventory account would incorrectly increase the value of the inventory.
3. All other significant direct materials quantity variances (debit or credit balances) are split between inventory accounts and the cost of goods sold account in proportion to the amount of the material remaining on that account.

Variance Apportionment Example – Insignificant

In the example used above the quantity variance was unfavorable leaving a debit balance of 800 on the variance account. Assume for simplicity that this was the only direct materials quantity variance for the year.

If the balance is considered insignificant in relation to the size of the business, then it can simply be transferred to the cost of goods sold account.

Variance Apportionment Example – Significant

If however, it is considered to be significant in relation to the size of the business, then the variance needs to be analyzed between the inventory accounts (raw material, work in process, and finished goods) and the cost of goods sold account.

Suppose for example, 30% of the material remained in the work in process inventory, 25% remained in finished goods inventory and 45% had been used in production and the items sold, then the direct materials quantity variance account balance needs to be split as follows:

And the bookkeeping journal to post the transaction to clear the direct materials variance account would be as follows:

The debit balance on the direct materials quantity variance account (800) has now been split between the work in process inventory account (240), the finished goods inventory account (200) and the cost of goods sold account (360), increasing all three accounts by the appropriate amount, and clearing the variance account balance.