23:08
Faizan
Managerial accountants work closely with the production department to understand the cost of each product produced and analyze the process. Direct material comprises the most direct cost incurred in the production process. Managerial accountants assist the production staff in differentiating between direct materials and indirect materials. Managerial accountants also analyze the difference between expected material costs and actual material costs through the calculation of variances.
Identification
Manufacturing companies receive a variety of materials to use in the production process. The production staff uses some materials directly in the production of the final product. These materials are considered direct materials. The production staff uses other materials to ease the manufacturing process, either by maintaining the production facility, by maintaining the production equipment or by being used in minute quantities in the production process. The managerial accountant collaborates with the production staff to identify which materials are direct and which are indirect.
Cost
Companies need to determine their direct material cost for several reasons. Direct material cost makes up a significant portion of the total product cost. Companies use the total product cost to make pricing decisions and determine profitability. Companies also use the direct material cost to compare suppliers. Direct material cost includes the cost of the material itself, along with shipping charges. Direct material cost is reduced by any discounts offered from the supplier, such as early payment discounts or quantity discounts.
Direct Material Variances
Direct material cost never equals the expected direct material cost. The difference between the expected cost and the actual cost is called a variance. The direct material cost variance can be divided into two separate variances---the direct materials usage variance and the direct materials price variance. Variances may be favorable or unfavorable. All variances should be investigated to determine the cause for the variance.
Direct Material Usage Variance
The direct material usage variance measures the difference between the actual quantity of material used and the expected quantity of material to be used. A favorable direct material usage variance indicates that the actual quantity of the direct materials used is less than the expected usage. An unfavorable direct material usage variance indicates that the actual usage of the direct materials is more than the expected usage. Direct material usage variances result from poor quality materials, equipment problems or not using enough materials on the production line.
Direct Material Price Variance
The direct material price variance measures the difference between the actual price and the expected price for each unit of material used. A favorable direct material price variance indicates that the actual cost of the direct materials is less than the expected cost. An unfavorable direct material price variance indicates that the actual cost of the direct materials is more than the expected cost. Direct material price variances result from supplier price changes or unanticipated discounts.
IdentificationManufacturing companies receive a variety of materials to use in the production process. The production staff uses some materials directly in the production of the final product. These materials are considered direct materials. The production staff uses other materials to ease the manufacturing process, either by maintaining the production facility, by maintaining the production equipment or by being used in minute quantities in the production process. The managerial accountant collaborates with the production staff to identify which materials are direct and which are indirect.
Cost
Companies need to determine their direct material cost for several reasons. Direct material cost makes up a significant portion of the total product cost. Companies use the total product cost to make pricing decisions and determine profitability. Companies also use the direct material cost to compare suppliers. Direct material cost includes the cost of the material itself, along with shipping charges. Direct material cost is reduced by any discounts offered from the supplier, such as early payment discounts or quantity discounts.
Direct Material Variances
Direct material cost never equals the expected direct material cost. The difference between the expected cost and the actual cost is called a variance. The direct material cost variance can be divided into two separate variances---the direct materials usage variance and the direct materials price variance. Variances may be favorable or unfavorable. All variances should be investigated to determine the cause for the variance.
Direct Material Usage Variance
The direct material usage variance measures the difference between the actual quantity of material used and the expected quantity of material to be used. A favorable direct material usage variance indicates that the actual quantity of the direct materials used is less than the expected usage. An unfavorable direct material usage variance indicates that the actual usage of the direct materials is more than the expected usage. Direct material usage variances result from poor quality materials, equipment problems or not using enough materials on the production line.
Direct Material Price Variance
The direct material price variance measures the difference between the actual price and the expected price for each unit of material used. A favorable direct material price variance indicates that the actual cost of the direct materials is less than the expected cost. An unfavorable direct material price variance indicates that the actual cost of the direct materials is more than the expected cost. Direct material price variances result from supplier price changes or unanticipated discounts.
Posted in: Products & Brands
