Related Articles
- 1 Reasons for Unfavorable Direct Material Efficiency Variances
- 2 Calculate Direct Labor Hours & Allocation Base
- 3 Calculate the Predetermined Overhead Application Rate for Absorption Costing Purposes
- 4 Determine the Value of Inventory Using FIFO
Loading cost in primavera schedule using resources and expenses r01. Sometime cost to complete or remaining/actual cost has nothing to do with the remaining duration or% complete. So expenses give you option to manage cost regardless of how much duration is remaining or how much% of activity you have completed. Primavera P6 Enterprise Project Portfolio Management - Version 5.0 to 8.0 Release 5.0 to 8.0: How To Edit Budgeted Total Cost And Actual Total Cost For An Activity.
Direct materials cost is a main component of a product's total cost along with direct labor cost and manufacturing overhead. While no business' costs can remain constant because of changes in both internal management practices and outside market factors, direct materials cost may experience more fluctuations from changing purchasing conditions and ongoing manufacturing controls. Given the uncertainty of manufacturing costs affected by materials purchases and production processes, businesses often assign planned or expected costs to a product by using the so-called standard costing system. This helps businesses carry out their operations without having to wait for actual costs to become available before taking action. The difference between standard costs and actual costs is calculated and analyzed periodically to alert management about the impact on the product's profitability.
1.Set up a standard costing system for direct materials. A business can initially assume or budget direct materials cost by implementing a standard costing system to estimate the expected purchase price and production usage of direct materials using the best information available. Having set the budgeted direct materials cost, a business can go ahead with plans for purchasing and production. The standard costing system requires that the purchased direct materials inventory be recorded at the standard or estimated cost and the amount of direct materials used in production also recorded at the estimated rate of usage, which is then converted to the dollar amount based on the standard cost. Using standard costing on direct materials, a business can also plan for future sales and predict profitability under the assumed conditions.
2.Calculate direct material price variance. As actual direct materials costs become known when a purchase has been completed, a business will compare the difference between actual and standard cost by calculating the direct materials price variance. Suppose that the business has set the standard direct materials cost at $20 per unit but actually purchases the materials later at $25 per unit for100 units for a total of $2,500. Thus, the business records a cash payment or accounts payable of $2,500, but only $2,000 ($20 per unit multiplied by 100 units) for the inventory of the materials on its books, with the difference of $500 recorded as an unfavorable direct material price variance. The extra cost of $500 is adjusted into actual cost proportionally later, depending on the amount of inventory used in production, and reduces the projected profitability.
3.Calculate direct material quantity variance. After the actual amount of direct materials consumed in production has been reported, a business will compare the difference between actual and standard quantity by calculating the direct material quantity variance. Suppose that the business has set the direct materials usage at 10 units of materials for making one unit of product but uses 12 units of materials for each finished product during actual production. Thus, the business records the value of each finished product at $20 per unit multiplied by 10 units equals $200, and the value of materials actually used in each product at $20 per unit multiplied by 12 units equals $240, with the difference of $40 recorded as an unfavorable direct material quantity variance. The additional cost of $40 in making each product is later adjusted into the actual product and reduces the projected profitability.
4.Calculate actual direct materials cost. Both the direct material price variance and quantity variance contribute to the deviation of actual direct materials cost from the estimated standard direct materials cost. The business expected to make each final product for $200 in direct materials cost by using 10 units of materials at $20 per unit. But it actually spent an extra $5 to purchase every unit of materials and used 12 units for making each final product, resulting in a price differential of $60. Combining the $60 price variance and the $40 quantity variance leads to $100 in additional cost in direct materials. Therefore, actual direct materials cost is calculated as $200 in standard cost plus additional cost of $100, equal to $300 total.
References (2)
About the Author
An investment and research professional, Jay Way started writing financial articles for Web content providers in 2007. He has written for goldprice.org, shareguides.co.uk and upskilled.com.au. Way holds a Master of Business Administration in finance from Central Michigan University and a Master of Accountancy from Golden Gate University in San Francisco.
Photo Credits
- Medioimages/Photodisc/Photodisc/Getty Images
Choose Citation Style
Way, Jay. 'How to Calculate Direct Materials Cost.' Small Business - Chron.com, http://smallbusiness.chron.com/calculate-direct-materials-cost-40259.html. Accessed 23 June 2019.
Way, Jay. (n.d.). How to Calculate Direct Materials Cost. Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/calculate-direct-materials-cost-40259.html
Way, Jay. 'How to Calculate Direct Materials Cost' accessed June 23, 2019. http://smallbusiness.chron.com/calculate-direct-materials-cost-40259.html
Note: Depending on which text editor you're pasting into, you might have to add the italics to the site name.