Direct Material Price Variance


Definition

Direct Material Price Variance is the difference between the actual cost of direct material and the standard cost of quantity purchased or consumed.

Formula

Direct Material Price Variance:

=Actual Quantity x Actual Price-Actual Quantity x Standard Price
=Actual cost-Standard Cost

Where:

  • Actual Quantity is the quantity purchased during a period if the variance is calculated at the time of material purchase
  • Actual Quantity is the quantity consumed during a period if the variance is calculated at the time of material consumption

Example

Cement PLC manufactured 10,000 bags of cement during the month of January. Following raw materials were purchased and consumed by Cement PLC during the period:

MaterialQuantityActual PriceStandard Price
Limestone100 tons$75/ton$70/ton
Clay150 tons$20/ton$24/ton
Sand250 tons$10/ton$12/ton

Material Price Variance will be calculated as follows:

Step 1: Calculate Actual Cost

Actual Cost = Actual Quantity x Actual Price
Limestone:100 tonsx$75=$7,500
Clay:150 tonsx$20=$3,000
Sand:250 tonsx$10=$2,500

Step 2: Find the Standard Cost of Actual Quantity

Standard Cost = Actual Quantity x Standard Price
Limestone:100 tonsx$70=$7,000
Clay:150 tonsx$24=$3,600
Sand:250 tonsx$12=$3,000

Step 3: Calculate the Variance

Material Price Variance = Actual Cost (Step 1) - Standard Cost (Step 2)
Limestone:$7,500-$7,000=($500)Adverse
Clay:$3,000-$3,600=$600Favorable
Sand:$2,500-$3,000=$500Favorable
Total Price Variance$600Favorable

Analysis

A favorable material price variance suggests cost effective procurement by the company.

Reasons for a favorable material price variance may include:

  • An overall decrease in the market price level
  • Purchase of materials of lower quality than the standard (this will be reflected in adverse material usage variance)
  • Better price negotiation by the procurement staff
  • Implementation of better procurement practices (e.g. invitation of price quotations from multiple suppliers)
  • Purchase discounts on larger orders

An adverse material price variance indicates higher purchase costs incurred during the period compared with the standard.

Reasons for adverse material price variance include:

  • An overall hike in the market price of materials
  • Purchase of materials of higher quality than the standard (this will be reflected in favorable material usage variance)
  • Increase in bargaining power of suppliers
  • Loss of purchase discounts due to smaller order sizes
  • Inefficient buying by the procurement staff

MCQ

Test Your Understanding

Fresh PLC is a manufacturer of toothpaste. One of the ingredients of Fresh Toothpaste is sodium fluoride powder. During a period, Fresh PLC purchased 10,000 KG of sodium fluoride at the cost of $20,000 ($2 per KG). Further information includes the following:

-Standard price of sodium fluoride is $1.5 per KG
-Fresh PLC was only able to use 9,000 KG of the material during the period
-Fresh PLC values stock on standard cost basis

What is the material price variance?

$4500 Adverse

$5,000 Adverse