Study guide
11.2 Sales Price, Sales Volume & Direct Material Variances
ACCA Applied Knowledge — Management Accounting MA
Track your progress as you read
Finished sections get a check mark.
1 Chapter 1: Nature, Purpose & Source of Management Information
1.1 Role of Management Accounting, Planning Levels & Information Quality 1.2 Sources of Data, Big Data & Data Capture Costs 1.3 Cost Classification, Cost Behaviour & Coding Systems
2 Chapter 2: Cost Centres, Cost Units & Presenting Information
2.1 Cost Objects, Responsibility Centres & Managerial Needs 2.2 Presenting Management Information & Visualisation
3 Chapter 3: Sampling Methods, Statistical Summaries & Spreadsheets
3.1 Sampling Methods & Practical Selection 3.2 Data Summarisation, Dispersion & Probability in Decisions 3.3 Normal Distribution & Spreadsheet Applications in Accounting
4 Chapter 4: Forecasting Techniques, Time Series & Index Numbers
4.1 Linear Functions & The High-Low Method 4.2 Correlation, Linear Regression & Product Life Cycle 4.3 Time Series Analysis & Index Numbers
5 Chapter 5: Accounting for Materials & Inventory Control
5.1 Material Procedures, Physical Control & Inventory Valuation 5.2 Economic Order Quantity & Bulk Purchase Discounts 5.3 Economic Batch Quantity & Inventory Reorder Levels
6 Chapter 6: Accounting for Labour & Overhead Costs
6.1 Accounting for Labour, Remuneration Systems & Labour Ratios 6.2 Overhead Allocation, Apportionment & Reciprocal Reapportionment 6.3 Overhead Absorption Rates & Under/Over Absorption
7 Chapter 7: Marginal Costing & Absorption Costing
7.1 Marginal Costing, Contribution & Cost-Volume-Profit Analysis 7.2 Profit Comparison & Reconciliation Between Absorption and Marginal Costing
8 Chapter 8: Costing Methods & Alternative Principles
8.1 Job Costing, Batch Costing & Service/Operation Costing 8.2 Process Costing, Losses, Gains & Joint/By-Products 8.3 Alternative Cost Accounting: ABC, Target Costing & Life-Cycle Costing
9 Chapter 9: Budgetary Planning, Preparation & Behaviour
9.1 Budgetary Framework, Administration & The Principal Budget Factor 9.2 Functional Budgets, Cash Budgets & Master Budgets 9.3 What-If Analysis, Motivation & Behavioural Aspects of Budgeting
10 Chapter 10: Flexible Budgets & Capital Investment Appraisal
10.1 Flexible Budgets & Budgetary Control Reporting 10.2 Capital Expenditure, Compounding & Discounting Fundamentals 10.3 Discounted Cash Flow: NPV, IRR & Payback Methods
11 Chapter 11: Standard Costing & Basic Cost Variances
11.1 Standard Costing Purpose, Principles & Standard Cost Cards 11.2 Sales Price, Sales Volume & Direct Material Variances 11.3 Direct Labour & Overhead Variances
12 Chapter 12: Variance Investigation & Operating Statements
12.1 Variance Investigation, Interrelationships & Reverse Calculations 12.2 Operating Statements & Profit Reconciliations
13 Chapter 13: Performance Measurement Framework & Financial Analysis
13.1 Mission Statements, Objectives & Contextual Influences 13.2 Financial Performance: Profitability & Operating Efficiency Ratios 13.3 Financial Performance: Liquidity & Financial Gearing Ratios
14 Chapter 14: Divisional Performance, Multidimensional Models & Quality
14.1 Divisional Performance: Return on Investment & Residual Income 14.2 The Balanced Scorecard, Critical Success Factors & KPIs 14.3 Value for Money (3Es), Resource Utilisation & Non-Profit Performance 14.4 Quality Management, Benchmarking, Cost Control & Cost Reduction
11.2 Sales Price, Sales Volume & Direct Material Variances
Key Takeaways Explain This Topic AI
A variance is the difference between standard performance and actual results; variances are Favourable (F) if they increase profit and Adverse (A) if they reduce profit relative to benchmark.
The Sales Price Variance measures the revenue impact of selling above or below the standard selling price: (Actual Selling Price - Standard Selling Price) × Actual Units Sold.
The Sales Volume Variance reflects the financial impact of sales volume deviations, valued at Standard Profit per Unit under Absorption Costing and Standard Contribution per Unit under Marginal Costing.
The Direct Material Total Variance decomposes into the Material Price Variance, (Standard Price - Actual Price) × Actual Quantity, and Material Usage Variance, (Standard Quantity for Actual Output - Actual Quantity Used) × Standard Price.
Operational variances are frequently interdependent: purchasing substandard materials creates a favourable price variance but triggers adverse usage, labour efficiency, and customer satisfaction issues.
Last updated: September 2026
Sales Price, Sales Volume & Direct Material Variances
Core Principle: Variance analysis is the quantitative diagnostic engine of management accounting. By dissecting the difference between planned performance and actual financial outcomes, variance analysis isolates commercial pricing dynamics from volume changes and separates procurement price efficiency from factory floor material usage. The cardinal rule of cost variance analysis is that actual material consumption must always be compared to the flexed standard allowance for actual output achieved , never to the original static budget.
1. Fundamentals of Variance Analysis & Terminology
A variance is the financial difference between a predetermined standard benchmark and the actual accounting outcome achieved during an operational control period: Variance = Standard Allowance (Flexed) − Actual Cost (for Costs) \text{Variance} = \text{Standard Allowance (Flexed)} - \text{Actual Cost} \quad \text{(for Costs)} Variance = Standard Allowance (Flexed) − Actual Cost (for Costs) Variance = Actual Revenue − Standard Revenue (for Revenues) \text{Variance} = \text{Actual Revenue} - \text{Standard Revenue} \quad \text{(for Revenues)} Variance = Actual Revenue − Standard Revenue (for Revenues)
Direction of Variances: Favourable vs. Adverse
Favourable Variance (F): Arises when actual revenues exceed standard expectations, or when actual costs are lower than standard allowances. A favourable variance increases operating profit relative to the budget.
Adverse Variance (A): (Also termed Unfavourable [U]). Arises when actual revenues fall short of standard targets, or when actual costs exceed standard allowances. An adverse variance reduces operating profit relative to the budget.
Note
In ACCA examinations, always append the letter (F) or (A) to every variance figure. Stating a numerical figure without indicating whether it is favourable or adverse earns zero marks.
2. Sales Variances: Price and Volume
Sales variances explain why the actual commercial gross margin or contribution differs from the original master budget. Total sales variance subdivides into the Sales Price Variance and the Sales Volume Variance . Total Sales Variance
- ┌──────────────────┴──────────────────┐
- ▼ ▼
- Sales Price Variance Sales Volume Variance
- (Price Deviation on Actual Units) (Quantity Deviation on Units)
- │
- ┌──────────────────────┴──────────────────────┐
- ▼ ▼
- Under Marginal Costing Under Absorption Costing
- (Valued at Standard Contribution) (Valued at Standard Profit)
- A. Sales Price Variance
The Sales Price Variance isolates the impact on total revenue of selling units at prices differing from the pre-agreed standard catalog selling price: Sales Price Variance = ( Actual Selling Price − Standard Selling Price ) × Actual Units Sold \text{Sales Price Variance} = (\text{Actual Selling Price} - \text{Standard Selling Price}) \times \text{Actual Units Sold} Sales Price Variance = ( Actual Selling Price − Standard Selling Price ) × Actual Units Sold Sales Price Variance = Actual Sales Revenue − ( Actual Units Sold × Standard Selling Price ) \text{Sales Price Variance} = \text{Actual Sales Revenue} - (\text{Actual Units Sold} \times \text{Standard Selling Price}) Sales Price Variance = Actual Sales Revenue − ( Actual Units Sold × Standard Selling Price )
If Actual Price > Standard Price ⟹ Favourable (F) \text{Actual Price} > \text{Standard Price} \implies \mathbf{\text{Favourable (F)}} Actual Price > Standard Price ⟹ Favourable (F)
If Actual Price < Standard Price ⟹ Adverse (A) \text{Actual Price} < \text{Standard Price} \implies \mathbf{\text{Adverse (A)}} Actual Price < Standard Price ⟹ Adverse (A)
Operational Causes of Sales Price Variances:
Favourable: Price increases introduced to pass on unexpected inflation; premium pricing due to superior branding or product shortages; unexpected market demand surges.
Adverse: Price discounts authorized to clear aging or slow-moving stock; aggressive price-cutting to match predatory competitor tactics; discounts granted to large institutional buyers for bulk orders.
B. Sales Volume Variance
The Sales Volume Variance calculates the financial gain or loss resulting from selling a different physical quantity of units than originally planned in the master budget.
The Critical Distinction: Absorption Costing vs. Marginal Costing
How the sales volume variance is valued depends fundamentally on whether the entity operates absorption costing or marginal costing:
Under Standard Absorption Costing: Sales Volume Variance Absorption = ( Actual Units Sold − Budgeted Units Sold ) × Standard Profit per Unit \text{Sales Volume Variance}_{\text{Absorption}} = (\text{Actual Units Sold} - \text{Budgeted Units Sold}) \times \mathbf{\text{Standard Profit per Unit}} Sales Volume Variance Absorption = ( Actual Units Sold − Budgeted Units Sold ) × Standard Profit per Unit
Rationale: In absorption costing, fixed overheads are already absorbed into the unit cost. Therefore, selling one additional unit is assumed to generate the standard net operating profit per unit.
Under Standard Marginal Costing: Sales Volume Variance Marginal = ( Actual Units Sold − Budgeted Units Sold ) × Standard Contribution per Unit \text{Sales Volume Variance}_{\text{Marginal}} = (\text{Actual Units Sold} - \text{Budgeted Units Sold}) \times \mathbf{\text{Standard Contribution per Unit}} Sales Volume Variance Marginal = ( Actual Units Sold − Budgeted Units Sold ) × Standard Contribution per Unit
Rationale: In marginal costing, total fixed costs are treated as a fixed periodic lump sum that does not change with output in the short run. Therefore, selling one additional unit generates incremental contribution that flows 100% directly to increase operating profit.
- Feature Standard Absorption Costing Standard Marginal Costing
- Valuation Metric Standard Profit per unit Standard Contribution per unit
Equation Multiplier ( Actual Units − Budget Units ) × Std Profit (\text{Actual Units} - \text{Budget Units}) \times \text{Std Profit} ( Actual Units − Budget Units ) × Std Profit ( Actual Units − Budget Units ) × Std Contribution (\text{Actual Units} - \text{Budget Units}) \times \text{Std Contribution} ( Actual Units − Budget Units ) × Std Contribution
Numerical Value Lower monetary variance (Std Profit < < < Std Contribution) Higher monetary variance by the absorbed fixed overhead amount
Theoretical Justification Treats fixed cost as absorbed unit cost Recognizes fixed cost as periodic constant
Operational Causes of Sales Volume Variances:
Favourable: Effective sales and promotional campaigns; competitor supply disruptions or factory strikes; general macroeconomic growth; entrance into new export territories.
Adverse: Recessionary contraction in consumer spending; aggressive competitor product launches; loss of key customer accounts; supply bottlenecks preventing order fulfillment.
3. Direct Material Variances: Total, Price, and Usage
Direct material costs represent a primary operational expenditure in manufacturing. The Direct Material Total Variance decomposes into two distinct operational components: the Price Variance (purchasing efficiency) and the Usage Variance (shop-floor consumption efficiency). Direct Material Total Variance
- ┌───────────────────┴───────────────────┐
- ▼ ▼
- Direct Material Price Variance Direct Material Usage Variance
- (Procurement Cost Efficiency) (Factory Shop-Floor Efficiency)
- A. Direct Material Total Variance
The total variance represents the difference between what the actual output achieved should have cost in raw materials versus what it actually cost : Direct Material Total Variance = ( Standard Quantity for Actual Output × Standard Price ) − Actual Material Cost \text{Direct Material Total Variance} = (\text{Standard Quantity for Actual Output} \times \text{Standard Price}) - \text{Actual Material Cost} Direct Material Total Variance = ( Standard Quantity for Actual Output × Standard Price ) − Actual Material Cost Direct Material Total Variance = ( S Q × S P ) − Actual Cost \text{Direct Material Total Variance} = (SQ \times SP) - \text{Actual Cost} Direct Material Total Variance = ( SQ × SP ) − Actual Cost
B. Direct Material Price Variance
The Direct Material Price Variance measures the difference between the standard purchase price and the actual price paid for raw materials, evaluated across the quantity purchased or used: Direct Material Price Variance = ( Standard Price − Actual Price ) × Actual Quantity \text{Direct Material Price Variance} = (\text{Standard Price} - \text{Actual Price}) \times \text{Actual Quantity} Direct Material Price Variance = ( Standard Price − Actual Price ) × Actual Quantity Direct Material Price Variance = ( A Q × S P ) − Actual Material Cost \text{Direct Material Price Variance} = (AQ \times SP) - \text{Actual Material Cost} Direct Material Price Variance = ( A Q × SP ) − Actual Material Cost
If Actual Price < Standard Price ⟹ Favourable (F) \text{Actual Price} < \text{Standard Price} \implies \mathbf{\text{Favourable (F)}} Actual Price < Standard Price ⟹ Favourable (F)
If Actual Price > Standard Price ⟹ Adverse (A) \text{Actual Price} > \text{Standard Price} \implies \mathbf{\text{Adverse (A)}} Actual Price > Standard Price ⟹ Adverse (A)
Point of Purchase vs. Point of Usage Convention:
Raw Material Inventory Valued at Standard Cost (ACCA Standard Practice): When raw materials are recorded in inventory at standard cost, the price variance is recognized at the time of purchase based on A Q purchased AQ_{\text{purchased}} A Q purchased . The stores ledger reflects standard cost immediately, and price variances do not sit trapped in inventory.
Raw Material Inventory Valued at Actual Cost (FIFO/AVCO): The price variance is recognized only at the time of usage based on A Q used AQ_{\text{used}} A Q used .
(Note: In examination scenarios where opening and closing raw material inventories are identical, or where purchases equal usage, A Q purchased = A Q used AQ_{\text{purchased}} = AQ_{\text{used}} A Q purchased = A Q used ).
C. Direct Material Usage Variance
The Direct Material Usage Variance measures the shop-floor efficiency of raw material consumption, comparing the physical quantity actually used against the standard quantity allowed for the actual output produced, valued at the standard price: Direct Material Usage Variance = ( Standard Quantity for Actual Output − Actual Quantity Used ) × Standard Price \text{Direct Material Usage Variance} = (\mathbf{\text{Standard Quantity for Actual Output}} - \text{Actual Quantity Used}) \times \mathbf{\text{Standard Price}} Direct Material Usage Variance = ( Standard Quantity for Actual Output − Actual Quantity Used ) × Standard Price Direct Material Usage Variance = ( S Q − A Q used ) × S P \text{Direct Material Usage Variance} = (SQ - AQ_{\text{used}}) \times SP Direct Material Usage Variance = ( SQ − A Q used ) × SP
If Actual Quantity Used < Standard Quantity ⟹ Favourable (F) \text{Actual Quantity Used} < \text{Standard Quantity} \implies \mathbf{\text{Favourable (F)}} Actual Quantity Used < Standard Quantity ⟹ Favourable (F)
If Actual Quantity Used > Standard Quantity ⟹ Adverse (A) \text{Actual Quantity Used} > \text{Standard Quantity} \implies \mathbf{\text{Adverse (A)}} Actual Quantity Used > Standard Quantity ⟹ Adverse (A)
Caution
The #1 Student Pitfall in Material Usage Variances: NEVER calculate standard quantity ( S Q SQ SQ ) using the original budgeted production volume! The standard quantity must always be flexed to reflect the volume of actual production achieved: Standard Quantity for Actual Output (SQ) = Actual Finished Units Produced × Standard Material Allowance per Unit \mathbf{\text{Standard Quantity for Actual Output (SQ)}} = \text{Actual Finished Units Produced} \times \text{Standard Material Allowance per Unit} Standard Quantity for Actual Output (SQ) = Actual Finished Units Produced × Standard Material Allowance per Unit Furthermore, the physical quantity deviation must always be multiplied by the STANDARD price ( S P SP SP ) , never by the actual price ( A P AP A P ). Using actual price would improperly contaminate the usage measurement with purchasing price fluctuations.
Mathematical Check and Reconciliation:
When raw material purchases equal raw material usage: Direct Material Total Variance = Material Price Variance + Material Usage Variance \text{Direct Material Total Variance} = \text{Material Price Variance} + \text{Material Usage Variance} Direct Material Total Variance = Material Price Variance + Material Usage Variance
4. Managerial Accountability and Interdependent Variances
In standard costing systems, departmental responsibility is clearly assigned, but management accountants must recognize operational interdependencies :
Responsibility Allocation
Procurement / Purchasing Manager: Accountable for the Direct Material Price Variance. Evaluated on supplier negotiations, market monitoring, delivery contracts, and bulk discounts.
Production / Factory Supervisor: Accountable for the Direct Material Usage Variance. Evaluated on machine calibration, operator handling, minimizing scrap, and storage control.
Operational Interdependencies (The Trade-Off Dilemma)
Departments do not operate in vacuums. A variance in one department frequently causes an offsetting variance in another: Interdependent Material Decisions
- Purchasing Decision: Cheap Materials Purchasing Decision: Premium Materials
- ┌───────────────────────────────────┐ ┌───────────────────────────────────┐
- │ • Sourced inferior grade inputs │ │ • Sourced superior grade inputs │
- │ │ │ │
- │ ► Favourable Material Price (F) │ │ ► Adverse Material Price (A) │
- │ │ │ │
- │ Downstream Operational Impact: │ │ Downstream Operational Impact: │
- │ • High scrap & offcuts │ │ • Zero defect rates │
- │ ► Adverse Material Usage (A) │ │ ► Favourable Material Usage (F) │
- │ • Machine jamming & rework │ │ • Faster, seamless processing │
- │ ► Adverse Labour Efficiency (A) │ │ ► Favourable Labour Effic. (F) │
- │ • Customer returns & warranty │ │ • Premium brand reputation │
- │ ► Adverse Sales Price/Vol (A) │ │ ► Favourable Sales Price (F) │
- └───────────────────────────────────┘ └───────────────────────────────────┘
Management Decision Direct Variance Impact Interdependent Consequential Variances
Buying Lower-Grade Material Favourable Material Price Variance Adverse Material Usage Variance (high scrap); Adverse Labour Efficiency Variance (machine jams and rework); Adverse Sales Price Variance (customer complaints).
Buying Premium-Grade Material Adverse Material Price Variance Favourable Material Usage Variance (minimal scrap); Favourable Labour Efficiency Variance (faster assembly); Favourable Sales Price Variance (premium quality).
Bulk Ordering for Volume Discounts Favourable Material Price Variance Deterioration in storage leading to Adverse Material Usage (spoilage/damage); Adverse Working Capital cash holding costs.
Unskilled Labour Substitution Favourable Labour Rate Variance Adverse Labour Efficiency (slow work); Adverse Material Usage (high scrap caused by operator errors).
5. Comprehensive Worked Numerical Example: Sales and Material Variances
Scenario: Chronos Horology Ltd manufactures a precision quartz movement, Calibre-7. The company's standard cost card and monthly budget for May show the following parameters:
Standard Cost Card per Unit (Calibre-7):
- Direct Materials: 3.0 kg of specialized alloy at $20.00 per kg = $60.00
- Direct Labour: 2.0 direct labour hours at $18.00 per hour = $36.00
- Variable Production Overhead: 2.0 hours at $5.00 per hour = $10.00
- Standard Marginal Cost per Unit: $106.00
Budgeted Fixed Production Overheads: $120,000 per month based on budgeted activity of 5,000 units (10,000 direct labour hours).
Standard Fixed Overhead Absorption Rate: $ 120 , 000 10 , 000 hours = $ 12.00 \frac{\text{\textdollar}120,000}{10,000 \text{ hours}} = \text{\textdollar}12.00 10 , 000 hours $ 120 , 000 = $ 12.00 per hour = $24.00 per unit
- Standard Total Absorption Cost per Unit: $130.00
- Standard Selling Price: $150.00 per unit
Standard Profit per Unit: $ 150.00 − $ 130.00 = $ 20.00 \text{\textdollar}150.00 - \text{\textdollar}130.00 = \mathbf{\text{\textdollar}20.00} $ 150.00 − $ 130.00 = $ 20.00
Standard Contribution per Unit: $ 150.00 − $ 106.00 = $ 44.00 \text{\textdollar}150.00 - \text{\textdollar}106.00 = \mathbf{\text{\textdollar}44.00} $ 150.00 − $ 106.00 = $ 44.00
Budgeted Activity for May: 5,000 units
Actual Results for May:
- Actual Finished Units Produced: 5,400 units
- Actual Units Sold: 5,200 units at an actual selling price of $146.00 per unit
Raw Materials Purchased & Used: 16,740 kg of specialized alloy at a total cost of $318,060 (actual purchase price = $ 318 , 060 16 , 740 kg = $ 19.00 \frac{\text{\textdollar}318,060}{16,740 \text{ kg}} = \text{\textdollar}19.00 16 , 740 kg $ 318 , 060 = $ 19.00 per kg).
(Note: There were no opening or closing raw material inventories).
Step 1: Calculate Sales Variances
1. Sales Price Variance: Sales Price Variance = ( Actual Price − Standard Price ) × Actual Units Sold \text{Sales Price Variance} = (\text{Actual Price} - \text{Standard Price}) \times \text{Actual Units Sold} Sales Price Variance = ( Actual Price − Standard Price ) × Actual Units Sold Sales Price Variance = ( $ 146.00 − $ 150.00 ) × 5 , 200 units = − $ 4.00 × 5 , 200 = − $ 20 , 800 ⟹ $ 20 , 800 Adverse (A) \text{Sales Price Variance} = (\$146.00 - \$150.00) \times 5,200 \text{ units} = -\$4.00 \times 5,200 = -\$20,800 \implies \mathbf{\$20,800 \text{ Adverse (A)}} Sales Price Variance = ( $146.00 − $150.00 ) × 5 , 200 units = − $4.00 × 5 , 200 = − $20 , 800 ⟹ $20 , 800 Adverse (A)
Check: Actual Revenue ( 5 , 200 × $ 146 = $ 759 , 200 ) − Actual Units at Std Price ( 5 , 200 × $ 150 = $ 780 , 000 ) = − $ 20 , 800 \text{Actual Revenue} (5,200 \times \text{\textdollar}146 = \text{\textdollar}759,200) - \text{Actual Units at Std Price} (5,200 \times \text{\textdollar}150 = \text{\textdollar}780,000) = -\text{\textdollar}20,800 Actual Revenue ( 5 , 200 × $ 146 = $ 759 , 200 ) − Actual Units at Std Price ( 5 , 200 × $ 150 = $ 780 , 000 ) = − $ 20 , 800 .
2. Sales Volume Variance under Absorption Costing: Sales Volume Variance = ( Actual Units Sold − Budgeted Units Sold ) × Standard Profit per Unit \text{Sales Volume Variance} = (\text{Actual Units Sold} - \text{Budgeted Units Sold}) \times \text{Standard Profit per Unit} Sales Volume Variance = ( Actual Units Sold − Budgeted Units Sold ) × Standard Profit per Unit Sales Volume Variance = ( 5 , 200 units − 5 , 000 units ) × $ 20.00 = + 200 units × $ 20.00 = + $ 4 , 000 ⟹ $ 4 , 000 Favourable (F) \text{Sales Volume Variance} = (5,200 \text{ units} - 5,000 \text{ units}) \times \$20.00 = +200 \text{ units} \times \$20.00 = +\$4,000 \implies \mathbf{\$4,000 \text{ Favourable (F)}} Sales Volume Variance = ( 5 , 200 units − 5 , 000 units ) × $20.00 = + 200 units × $20.00 = + $4 , 000 ⟹ $4 , 000 Favourable (F)
3. Sales Volume Variance under Marginal Costing: Sales Volume Variance = ( Actual Units Sold − Budgeted Units Sold ) × Standard Contribution per Unit \text{Sales Volume Variance} = (\text{Actual Units Sold} - \text{Budgeted Units Sold}) \times \text{Standard Contribution per Unit} Sales Volume Variance = ( Actual Units Sold − Budgeted Units Sold ) × Standard Contribution per Unit Sales Volume Variance = ( 5 , 200 units − 5 , 000 units ) × $ 44.00 = + 200 units × $ 44.00 = + $ 8 , 800 ⟹ $ 8 , 800 Favourable (F) \text{Sales Volume Variance} = (5,200 \text{ units} - 5,000 \text{ units}) \times \$44.00 = +200 \text{ units} \times \$44.00 = +\$8,800 \implies \mathbf{\$8,800 \text{ Favourable (F)}} Sales Volume Variance = ( 5 , 200 units − 5 , 000 units ) × $44.00 = + 200 units × $44.00 = + $8 , 800 ⟹ $8 , 800 Favourable (F)
Notice the Difference: $ 8 , 800 (Marginal) − $ 4 , 000 (Absorption) = $ 4 , 800 \text{\textdollar}8,800 \text{ (Marginal)} - \text{\textdollar}4,000 \text{ (Absorption)} = \text{\textdollar}4,800 $ 8 , 800 (Marginal) − $ 4 , 000 (Absorption) = $ 4 , 800 .
This difference equals 200 units × $ 24.00 fixed overhead per unit = $ 4 , 800 200 \text{ units} \times \text{\textdollar}24.00 \text{ fixed overhead per unit} = \text{\textdollar}4,800 200 units × $ 24.00 fixed overhead per unit = $ 4 , 800 .
Step 2: Calculate Direct Material Variances
1. Standard Quantity Allowed for Actual Output: S Q = Actual Production Output × Standard Usage per Unit = 5 , 400 units × 3.0 kg = 16 , 200 kg \mathbf{SQ} = \text{Actual Production Output} \times \text{Standard Usage per Unit} = 5,400 \text{ units} \times 3.0 \text{ kg} = \mathbf{16,200 \text{ kg}} SQ = Actual Production Output × Standard Usage per Unit = 5 , 400 units × 3.0 kg = 16 , 200 kg
2. Direct Material Price Variance: Material Price Variance = ( Standard Price − Actual Price ) × Actual Quantity Purchased/Used \text{Material Price Variance} = (\text{Standard Price} - \text{Actual Price}) \times \text{Actual Quantity Purchased/Used} Material Price Variance = ( Standard Price − Actual Price ) × Actual Quantity Purchased/Used Material Price Variance = ( $ 20.00 − $ 19.00 ) × 16 , 740 kg = + $ 1.00 × 16 , 740 kg = + $ 16 , 740 ⟹ $ 16 , 740 Favourable (F) \text{Material Price Variance} = (\$20.00 - \$19.00) \times 16,740 \text{ kg} = +\$1.00 \times 16,740 \text{ kg} = +\$16,740 \implies \mathbf{\$16,740 \text{ Favourable (F)}} Material Price Variance = ( $20.00 − $19.00 ) × 16 , 740 kg = + $1.00 × 16 , 740 kg = + $16 , 740 ⟹ $16 , 740 Favourable (F)
Check: ( 16 , 740 kg × $ 20.00 = $ 334 , 800 ) − $ 318 , 060 = + $ 16 , 740 (16,740 \text{ kg} \times \text{\textdollar}20.00 = \text{\textdollar}334,800) - \text{\textdollar}318,060 = +\text{\textdollar}16,740 ( 16 , 740 kg × $ 20.00 = $ 334 , 800 ) − $ 318 , 060 = + $ 16 , 740 .
3. Direct Material Usage Variance: Material Usage Variance = ( S Q − A Q ) × Standard Price \text{Material Usage Variance} = (SQ - AQ) \times \text{Standard Price} Material Usage Variance = ( SQ − A Q ) × Standard Price Material Usage Variance = ( 16 , 200 kg − 16 , 740 kg ) × $ 20.00 = − 540 kg × $ 20.00 = − $ 10 , 800 ⟹ $ 10 , 800 Adverse (A) \text{Material Usage Variance} = (16,200 \text{ kg} - 16,740 \text{ kg}) \times \$20.00 = -540 \text{ kg} \times \$20.00 = -\$10,800 \implies \mathbf{\$10,800 \text{ Adverse (A)}} Material Usage Variance = ( 16 , 200 kg − 16 , 740 kg ) × $20.00 = − 540 kg × $20.00 = − $10 , 800 ⟹ $10 , 800 Adverse (A)
4. Direct Material Total Variance: Material Total Variance = ( S Q × S P ) − Actual Material Cost \text{Material Total Variance} = (SQ \times SP) - \text{Actual Material Cost} Material Total Variance = ( SQ × SP ) − Actual Material Cost Material Total Variance = ( 16 , 200 kg × $ 20.00 ) − $ 318 , 060 = $ 324 , 000 − $ 318 , 060 = + $ 5 , 940 ⟹ $ 5 , 940 Favourable (F) \text{Material Total Variance} = (16,200 \text{ kg} \times \$20.00) - \$318,060 = \$324,000 - \$318,060 = +\$5,940 \implies \mathbf{\$5,940 \text{ Favourable (F)}} Material Total Variance = ( 16 , 200 kg × $20.00 ) − $318 , 060 = $324 , 000 − $318 , 060 = + $5 , 940 ⟹ $5 , 940 Favourable (F)
Reconciliation: Price Variance ( + $ 16 , 740 F ) + Usage Variance ( − $ 10 , 800 A ) = + $ 5 , 940 Favourable (F) \text{Price Variance} (+\text{\textdollar}16,740 \text{ F}) + \text{Usage Variance} (-\text{\textdollar}10,800 \text{ A}) = \mathbf{+\text{\textdollar}5,940 \text{ Favourable (F)}} Price Variance ( + $ 16 , 740 F ) + Usage Variance ( − $ 10 , 800 A ) = + $ 5 , 940 Favourable (F) . The reconciliation matches exactly.
Step 3: Diagnostic Narrative & Operational Investigation
A management accountant reviewing these results would observe a classic operational interdependency:
The procurement department negotiated a discounted price ($19.00 vs. $20.00 standard), generating a $16,740 Favourable Price Variance .
However, the alloy may have been lower grade or slightly below specification, resulting in an excess consumption of 540 kg of material on the factory floor ( $10,800 Adverse Usage Variance ).
Overall, the net material effect was positive ($5,940 Favourable), but commercial sales suffered: to clear output, the sales team had to discount the selling price by $4.00 per unit, generating a heavy $20,800 Adverse Sales Price Variance .