Joint Direct Materials Variance Acme Manufacturing produces corrugated board containersthat the nearby wine industry uses to package wine in bulk. Acme buys kraft paper by the ton, converts it to heavy-duty paperboard on its corrugator, and then cuts and glues it into folding boxes. Theboxes are opened and filled with a plastic liner and then with the wine.Many other corrugated board converters are in the area, and competition is strong. Acme is eagerto keep its costs under control. The company has used a standard cost system for several years.Responsibility for variances has been established. For example, the purchasing agent is responsiblefor the direct materials price variance, and the general supervisor answers for the direct materialsusage variance.Recently, the industrial engineer and the company’s management accountant participated in aworkshop sponsored by the Institute of Management Accountants (IMA) at which there was somediscussion of variance analysis. They noted that the workshop proposed that the responsibility forsome variances was properly dual. The accountant and engineer reviewed Acme’s system and werenot sure how to adapt the new information to it.Acme has the following standards for its direct materials:Standard direct materials cost per gross of finished boxes = 5 tons of kraft paper at$10 per ton = $50.00During May, the management accountant for the company assembled the following data:Units of finished product: 5,000 gross of finished boxesActual cost of direct materials used during the month: $324,000 for 27,000 tonsDirect materials put into production (used): 27,000 tonsAcme began and finished the month of May with no inventory of direct materialsRequired Determine the following for Acme (Round all variances to the nearest whole dollar):1. Direct materials price variance, calculated at point of production. Was this variance favorable (F) orunfavorable (U)?2. Direct materials usage variance. Was this variance favorable (F) or unfavorable (U)? 3. “Pure” direct materials price variance [defined as: SQ × (AP − SP)]. Was this variance favorable (F) orunfavorable (U)? 4. Direct materials joint price-quantity variance [defined as: (AP – SP) × (AQ – SQ)]. Was this variancefavorable (F) or unfavorable (U)? (Hint: You can determine the sign of the joint price-quantity varianceby working backward from the total DM variance [= (AP × AQ) – (SP × SQ)], subtracting the “pure”price variance and the usage variance [both of which are calculated above].)
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Joint Direct Materials Variance Acme Manufacturing produces corrugated board containers
that the nearby wine industry uses to package wine in bulk. Acme buys kraft paper by the ton, converts it to heavy-duty paperboard on its corrugator, and then cuts and glues it into folding boxes. The
boxes are opened and filled with a plastic liner and then with the wine.
Many other corrugated board converters are in the area, and competition is strong. Acme is eager
to keep its costs under control. The company has used a
Responsibility for variances has been established. For example, the purchasing agent is responsible
for the direct materials price variance, and the general supervisor answers for the direct materials
usage variance.
Recently, the industrial engineer and the company’s
workshop sponsored by the Institute of Management Accountants (IMA) at which there was some
discussion of variance analysis. They noted that the workshop proposed that the responsibility for
some variances was properly dual. The accountant and engineer reviewed Acme’s system and were
not sure how to adapt the new information to it.
Acme has the following standards for its direct materials:
Standard direct materials cost per gross of finished boxes = 5 tons of kraft paper at
$10 per ton = $50.00
During May, the management accountant for the company assembled the following data:
Units of finished product: 5,000 gross of finished boxes
Actual cost of direct materials used during the month: $324,000 for 27,000 tons
Direct materials put into production (used): 27,000 tons
Acme began and finished the month of May with no inventory of direct materials
Required Determine the following for Acme (Round all variances to the nearest whole dollar):
1. Direct materials price variance, calculated at point of production. Was this variance favorable (F) or
unfavorable (U)?
2. Direct materials usage variance. Was this variance favorable (F) or unfavorable (U)?
3. “Pure” direct materials price variance [defined as: SQ × (AP − SP)]. Was this variance favorable (F) or
unfavorable (U)?
4. Direct materials joint price-quantity variance [defined as: (AP – SP) × (AQ – SQ)]. Was this variance
favorable (F) or unfavorable (U)? (Hint: You can determine the sign of the joint price-quantity variance
by working backward from the total DM variance [= (AP × AQ) – (SP × SQ)], subtracting the “pure”
price variance and the usage variance [both of which are calculated above].)
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