What does a favorable direct materials cost variance indicate?
Isabella Turner
Updated on January 03, 2026
Favorable direct materials cost variance occurs when the company had savings or incur costs that is less than what is budgeted. That would happen when the actual costs of the purchases in materials is less than the company’s budgeted or standard costs for that direct materials.
Is the direct materials price variance favorable or unfavorable?
If actual price is greater than standard price, the variance is unfavorable since the company paid more than what it has set. If actual price is less than standard price, the variance is favorable….Formula and Example.
| DM price variance | = | (AP – SP) x AQ |
|---|---|---|
| DM price variance | = | $5,000 unfavorable |
Why a Favourable variance does not necessarily indicate good performance?
Obtaining a favorable variance (or, for that matter, an unfavorable variance) does not necessarily mean much, since it is based upon a budgeted or standard amount that may not be an indicator of good performance.
What are the possible causes of material price variance?
Causes of the Materials Price Variance
- Rush deliveries.
- Market-driven pricing changes, such as changes in the prices of commodities.
- Bargaining power changes by suppliers, who may be able to impose higher prices than expected.
Who is responsible for materials price variances?
The materials price variance is usually the responsibility of the purchasing manager. The materials quantity and labor efficiency variances are usually the responsibility of production managers and supervisors.
What are the causes of material price variance?
What does positive variance indicate?
A positive variance occurs where ‘actual’ exceeds ‘planned’ or ‘budgeted’ value. Examples might be actual sales are ahead of the budget.
What are the different types of variances?
Types of variances
- Variable cost variances. Direct material variances. Direct labour variances. Variable production overhead variances.
- Fixed production overhead variances.
- Sales variances.
What are the possible causes of material cost variance?
Following are the possible causes of this variance:
- Careless handling of materials by employees.
- Use of poor quality material.
- Poor maintenance and defects in machinery.
- Change in production design and production methods.
- Abnormal wastage.
- Pilferage of material due to inadequate inspection.
- Wrong mixture of materials.
What are some possible causes of a direct labor time variance?
Causes of a Labor Rate Variance
- Incorrect standards. The labor standard may not reflect recent changes in the rates paid to employees.
- Pay premiums. The actual amounts paid may include extra payments for shift differentials or overtime.
- Staffing variances.
- Component tradeoffs.
- Benefits changes.
What are the two direct materials variances what factors can affect each variance and who is generally responsible for the variance?
The two direct materials variances are the materials price variance and the materials quantity variance. The purchasing department would be responsible for the price variance while the production department would be responsible for the quantity variance.
Is a positive variance good or bad?
A favorable budget variance refers to positive variances or gains; an unfavorable budget variance describes negative variance, indicating losses or shortfalls. Budget variances occur because forecasters are unable to predict future costs and revenue with complete accuracy.
