It is the job of managerial accountants to work in conjunction with the manufacturing department to identify the cost of each product manufactured and make an assessment. Direct materials mainly consist of the most direct costs associated with the manufacturing or production process. Managerial accountants not only assist the manufacturing staff in differentiating direct materials from indirect ones, but also assess the key difference between expected and actual material costs by way of variance estimation.
Identification
Manufacturing organizations make use of various kinds of raw materials in the manufacturing process; these are used directly by the manufacturing staff in the production of the final product. Such materials are called direct materials. Other materials used by the staff ease down the entire process, through maintenance of the manufacturing facility, the production equipment or through their use in very low quantities in the manufacturing process. Managerial accountants are responsible for working closing with the manufacturing staff to make a difference between direct and indirect materials.
Cost
Manufacturing organizations need to determine their costs incurred on direct materials for various reasons, which account for a relevant part of the total product costs in order to make informed pricing decisions and determine profitability. Direct material costs that includes shipping charges as well; also help organizations in making a comparison among suppliers. These costs can be minimized by discounts that maybe offered by the suppliers, such as quantity or payment discounts.
Direct Material Variances
Direct Material Variances refer to the dissimilarities between actual direct material costs and expected direct material costs – these can be in terms of usage as well as price. These variances could be favorable or unfavorable. Nevertheless, they should be properly examined to understand the cause for such variances.
Direct Material Usage Variance
It measures the variance between the actual quantity of material used and its expected quantity to be used. Favorable direct material usage variance would mean that the actual quantity used is less than the expected quantity. Similarly, unfavorable direct material usage variance would mean the actual quantity used is more than the expected quantity. Any variances between actual and expected quantity usage can be attributed to poor quality of materials, problems in equipment and even not making ample of materials on the manufacturing line.
Direct Material Price Variance
This measures the variance between the actual price of unit materials used and their expected price. Favorable variance shows actual costs to be lesser than expected, and unfavorable variance indicates the opposite. These variances emanate from vendor price changes or sudden discounts.
