Direct Materials Price and Quantity Standards

Direct Materials Price and Quantity Standards:

Learning Objective of the articles:

  1. Define and explain direct materials price standards and direct materials quantity standards.
  2. Explain how direct materials price and quantity standards are set?


  1. Direct Materials Price Standards
  2. Direct Materials Quantity Standards
  3. Example of standard cost card

Direct Materials Price Standards:

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 called 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
Standard price per pound

$ 3.60

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.

Direct Materials Quantity Standards:

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 passed.

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)


*A 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 scrapped.

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.

Example of standard cost card:

(1) (2) (3)


Standard Quantity or Hours Standard Price or
Standard Cost
(1) × (2)
Direct materials 3.0 pounds $ 4.00 $ 12.00
Direct labor 2.5 hours $ 14.00 $ 35.00
Variable manufacturing overhead 2.5 hours $ 3.00 $ 7.50
Total standard cost per unit $54.50

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.

In Business | Standards in the Spanish Royal Tobacco FactoryStandards 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”

You may also be interested in other articles from “standard costing and variance analysis” chapter

  1. Standard Costs and Management By Exception
  2. Setting Standard Costs – Ideal Versus Practical Standards
  3. Direct Materials Price and Quantity Standards
  4. Direct Materials Price Variance
  5. Direct Materials Quantity Variance
  6. Direct Labor Rate and Efficiency Standards
  7. Direct Labor Rate/Price Variance
  8. Direct Labor Efficiency | Usage | Quantity Variance
  9. Manufacturing Overhead Standards
  10. Overall or net factory overhead variance.
  11. Controllable variance
  12. Volume variance
  13. Spending variance
  14. Idle capacity variance
  15. Efficiency variance
  16. Spending variance
  17. Variable efficiency variance
  18. Fixed efficiency variance
  19. Idle capacity variance
  20. Mix and Yield Variance – Definition and Explanation
  21. Materials Mix and Yield Variance
  22. Labor Yield Variance
  23. Factory Overhead Yield variance
  24. Variance Analysis and Management By Exception
  25. Managerial importance and usefulness of variance analysis
  26. Advantages and Disadvantages of Standard Costing System
  27. Standard Costing Discussion Questions and Answers
  28. Standard Costing and Variance Analysis Formulas
  29. Standard Costing and Variance Analysis Problems and Solution
  30. Standard Costing and Variance Analysis Case Study

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