# 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:

 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 = \$3,000 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

## 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