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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

The materials cost variance report for Nickols Inc. indicates a large favorable materials price variance and a significant unfavorable materials quantity variance. What might have caused these offsetting variances?

To determine

Concept Introduction:

Direct material variances:

Direct material variances refer to the difference between the standard direct material cost and actual direct material cost incurred. Direct material cost variances are categorized into following two categories:

  1. Direct material Rate variance: this variance shows the difference of standard rate and actual rate of material. The formula to calculate this variance is as follows:
  2.   Direct material rate variance = (Actual rate – Standard rate) ×Actual Quantity

  3. Direct material usage variance: this variance shows the difference of standard usage and actual usage of material. The formula to calculate this variance is as follows:
  4.   Direct material usage variance = (Actual Quantity – Standard Quantity)×Standard rate

  5. Direct material cost variance: this variance shows the difference of standard cost and actual cost of material. The formula to calculate this variance is as follows:
  6.   Direct material cost variance = Direct material rate variance + Direct material usage variance

To Indicate:

The reason for offset between the two variances

Explanation

Direct material Rate variance: this variance shows the difference of standard rate and actual rate of material. The formula to calculate this variance is as follows:

  Direct material rate variance = (Actual rate – Standard rate) ×Actual Quantity

Direct material usage variance: this variance shows the difference of standard usage and actual usage of material. The formula to calculate this variance is as follows:

  Direct material usage variance = (Actual Quantity – Standard Quantity)

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