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:
| Material | Quantity | Actual Price | Standard Price |
|---|---|---|---|
|
Limestone |
100 tons |
$75/ton |
$70/ton |
|
Clay |
150 tons |
$20/ton |
$24/ton |
|
Sand |
250 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 tons |
x |
$75 |
= |
$7,500 |
|
Clay |
150 tons |
x |
$20 |
= |
$3,600 |
|
Sand |
250 tons |
x |
$10 |
= |
$2,500 |
Step 2: Find the Standard Cost of Actual Quantity
| Standard Cost = Actual Quantity x Standard Price | |||||
|---|---|---|---|---|---|
|
Limestone |
100 tons |
x |
$70 |
= |
$7,000 |
|
Clay |
150 tons |
x |
$24 |
= |
$3,600 |
|
Sand |
250 tons |
x |
$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 |
= |
$600 |
Favorable |
|
Sand |
$2,500 |
- |
$3,000 |
= |
$500 |
Favorable |
|
Total Price Variance |
$600 |
Favorable |
||||
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.
Quiz
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Take the free quiz below and find out!
Question 1
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
Incorrect.
(9,000 x $2.0) - (9,000 x $1.5)
The valuation of stock on standard cost basis implies that the entire effect of any price variance is to be accounted for in the current period. Therefore, the purchase cost of the entire quantity must be compared with the standard cost of the actual quantity.
$5,000 Adverse
Correct.
(10,000 x $2.0) - (10,000 x $1.5)
As the inventory is valued on standard cost, the material price variance must take the effect of the cost difference on entire quantity purchased during the period. This ensures that the entire gain or loss on the procurement of materials is reflected in the results of the current period.
If Fresh PLC values its stock on FIFO or other actual cost basis, then the variance may be calculated on the quantity consumed during the period.