Now we’re going to move into direct materials variance analysis, which has direct materials price variance analysis and direct materials efficiency variance.

These formulas are very similar to the direct labor variance formulas. The difference is that we’re focusing on direct materials instead of direct labor.

Direct Materials Variance Analysis – Example

Now we’re going to go through an example to begin dissecting the two types of direct labor variance analysis. Let’s look at the following numbers for a home manufacturer:

Standard Amounts: 

Build 50 Homes 

Each Home Requires 6,000 Board Feet of Wood 

Each Board Foot of Wood Costs $2

Actual Amounts:

Built 35 Homes

Each Home Required 6,500 Board Feet of Wood

Each Board Foot of Wood costs $1.75

We estimated that it would take 6,000 board feet of wood to construct a home and that each board foot would cost $2. Then, once we actually started making the homes, we realized that instead, it took 6,500 board feet of wood and each board foot of wood actually cost us $1.75.

With these numbers, let’s solve the direct materials price variance. We’re comparing the $2 per board foot of wood that we expected it to cost to the $1.75 that it actually did cost. Here it was $0.25 cheaper than expected, causing a favorable variance.

Direct Materials Price Variance = (Actual Price Per Measurement of Material – Standard Price Per Measurement of Material) X Actual Amount of Material Per Unit X Total Units Produced

We have a $0.25 difference per board foot of wood for the prices. Then we have to multiply it by the total board feet of wood we used. If we made 35 houses and each one required 6,500 board feet of wood, then we used 227,500 feet of wood so $0.25 X 227,500 gives us our favorable direct materials price variance of $56,875. 

Now let’s see whether we were less or more efficient with our use of the materials. We thought it was going to take 6,000 board feet of wood per home, and then it actually took 6,500. That means that we used up more material than we thought (i.e., we were less efficient)

Direct Materials Efficiency Variance = (Actual Amount of Materials Per Unit – Standard Amount of Materials Per Unit) X Standard Price Per Measurement of Material X Total Units Produced

Each house required 500 more board feet of wood than we expected. Then we had to multiply that by the standard rate of $2 per board foot of wood (always by the standard rate). Then by the 35 home, resulting in 500 X $2 X 35 = $35,000 unfavorable direct materials efficiency variance.