Direct Materials Price and Quantity Standards:
Learning Objective of
- Define and explain direct materials
price standards and direct materials quantity standards.
- Explain how direct materials price
and quantity standards are set?
Direct Materials Price Standards
Direct Materials Quantity Standards
Example of standard cost card
Definition and Explanation:
Standard price per unit of
direct materials is the price that should be paid for a single unit
of materials, including allowances for quality, quantity purchased,
shipping, receiving, and other such costs, net of any discounts allowed.
Price standards for
direct materials permit
checking the performance of the purchasing department and the influence of
various internal and external factors and measuring the effect of price
increase or decrease on the company's profits. Determining the price or cost
to be used as the standard cost often difficult, because the prices used are
controlled more by external factors than by company's management. Prices
selected should reflect current market prices and are generally used
throughout the forthcoming fiscal period. If the actual price paid is more
or less than the standard price, a price variance occurs. This is usually
direct materials price variance. Price increases or decreases occurring
during the fiscal period are recorded in the
materials price variance account(s). Price standards are revised at
inventory dates or whenever there is a major change in the market price of
any of the principle materials or parts
Standard price per unit for
direct materials should reflect the final delivered
cost of materials, net of any discounts taken. Allowances for freights and
handling should also be taken into account.
Calculation of standard price per unit of
direct materials or raw materials:
Purchase price, top-grade pewter
ingots, in 40-pounds ingots
Freight, by truck, from suppliers warehouse
Receiving and handling
Less purchase discount
price per pound
Notice that the standard price reflects a
particular grade of materials (top grade), purchased in particular lot size
(40 pound ingots), and delivered by a particular type of carrier (truck).
Allowances have also been made for handling and discounts. If every thing
proceeds according to these expectations, the net cost of a pound of pewter
(direct material in the example above) should therefore be $4.00.
Definition and Explanation:
Standard quantity per unit of
direct materials is the amount of
direct materials or
raw materials that should be
required to complete a single unit of product, including allowances for
normal waste, spoilage, rejects, and similar inefficiencies.
Quantity of usage standards are generally
developed from materials specifications prepared by the department
of engineering (mechanical, electrical, or chemical) or product design. In a
small or medium sized company, the superintendent or even the foremen will
state basic specifications regarding type, quantity, and quality of
raw materials need and operations to be performed.
Quantity standards should be set after the most
economical size, shape, and quality of the product and the results expected
from the use of various kinds and grades of materials have been analyzed The
standard quantity should be increased to include allowances for acceptable
levels of waste, spoilage, shrinkage, seepage, evaporation, and leakage. The
determination of spoilage or waste should be based on figures that prevail
after the experimental and developmental stages of the product have been
The standard quantity per unit for
direct materials should reflect the
amount of material required for each unit of finished product, as well as an
allowance for unavoidable waste, spoilage, and other normal inefficiencies.
Calculation of standard
quantity per unit of direct materials or raw materials:
|Materials requirement (in pounds) per unit as
specified in the bill of materials*
Allowance for wastage and spoilage
Allowance for rejects
Standard of materials requirements (in pounds)
bill of materials is a list that shows the quantity of each type of material
in a unit of finished product. It is a handy source of determining the basic
material input per unit, but it should be adjusted for waste and other factors
as shown above, when determining the standard quantity per unit of product.
"waste and spoilage" in the table above refers to materials that are wasted as a
normal part of the production process or that spoil before they are used.
"Rejects" refers to the
direct material contained in units that are defective and must be
Although it is common to recognize allowances for
waste, spoilage, and rejects when setting standard costs, this practice is now
coming into question. Those involved in
total quality management (TQM) and similar other
business improvement programs argue that no amount of waste or defects
should be tolerated. If allowances for waste, spoilage, and rejects are built
into the standard cost, the levels of those allowances should be periodically
reviewed and reduced over time to reflect improvement process, better training,
and better equipment.
Once the direct materials price and quantity standards have been set, the standard cost of a
material per unit of finished product can be computed as follows.
3 pounds per unit × $ 4.00 per pond =
$ 12 per unit
This $12 cost figure will appear as one item on the product's
standard cost card
as shown by the following example.
Standard Quantity or Hours
Standard Price or
(1) × (2)
|Total standard cost per unit
An important reason for separating standards
into two categories - price and quantity - is that different managers are
usually responsible for buying and for using inputs and these two activities
occur at different points in time. In the case of raw materials the
purchasing manager is responsible for the price, and this responsibility is
exercised at the time of purchase. In contrast, the production manager is
responsible for the amount of raw materials used, and this responsibility is
exercised when the materials are used in production, which may be many weeks
or months after the purchase date. It is important, therefore, that we
cleanly separate discrepancies due to deviations from price standards from
those due to deviations from quantity standards. Differences between
standard prices and actual prices and standard quantities and actual
quantities are called variances. The act of calculating and interpreting
variances is called variance analysis.
| Standards in
the Spanish Royal Tobacco Factory
Standards have been used for
centuries in commercial enterprises. For example, the
Spanish Royal Tobacco Factory in Seville
used standards to control costs in the 1700s. The Royal Tobacco Factory
had a monopoly over snuff and cigar production in Spain and was the
largest industrial building in Europe. Employee theft of tobacco was a
particular problem, due to its high value. Careful records were
maintained of the amount of tobacco leaf issued to each worker, the
number of cigars expected to be made based on standards, and the actual
production. The worker was not paid if the actual production was less
than the expected production. To minimize theft, tobacco was weighed
after each production step to determine the amount of wastage.
Source: Salvador Carmona, Mahmoud
Ezzamel, and Fernando Gutierrez, "Control and Cost Accounting Practices
in the Spanish Royal Tobacco Factory, "Accounting, Organizations, and
Society 22, no. 5, 1997, pp. 411-446"