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Materials Price Variance:

Definition:

When actual price paid for the materials is more or less than the standard price of the materials, the difference is called direct materials price variance.

If actual price paid is more than the standard price the difference is called unfavorable materials price variance. And if the actual price paid is less than the standard price of the materials, the difference is called favorable materials price variance.

Formula:

The following formula is used to calculate this variance:

Materials price variance = (Actual quantity purchased Actual price) - (Actual quantity purchased Standard price)

Example:

Assume that 5,000 pieces of Item 5-489 are purchased at a unit price of $2.47. The standard price per unit is $2.50.

Required: Calculate Direct materials price variance.

Solution:

  Pieces

Unit Cost = Amount
Actual quantity purchased at actual price 5,000   $2.47 actual   $12,350
Actual quantity purchased at standard price 5,000   $2.50 standard   12,500
     
 
      $(0.03)   $(150) fav.
     
 

The $150 variance is favorable because the actual price is less than the standard price, and $0.03 expresses the unit cost difference. This variance is calculated at the the time of purchase of materials so this variance is typically called materials purchase price variance. Alternatively the variance may also be recognized at the time when the material is used. If the variance is calculated at the time of usage, the variance is typically called materials price usage variance.

Most of the companies compute this variance at the time of purchase of materials rather than when they are used in production. There are two reasons for this practice:

  1. Delaying the computation of price variance until materials are used would result in less timely variance reports.
  2. By computing the price variance when the materials are purchased, the materials can be carried in the inventory accounts at their standard costs. This helps simplifying bookkeeping.

At what point should variances be brought to the attention of management? The answer is, the earlier, the better. The sooner deviations from standards are brought to the attention of management, the sooner problems can be evaluated and corrected.

Who is Responsible for Direct Materials Price Variance?

Generally speaking, the purchase manager has control over the price paid for goods and is therefore responsible for any price variation. Many factors influence the price paid for the goods, including number of units ordered in a lot, how the order is delivered, and the quality of materials purchased. A deviation in any of these factors from what was assumed when the standards were set can result in price variance. For example purchase of second grade materials rather than top-grade materials may be a reason of favorable price variance, since the lower grade material will generally be less costly but perhaps less suitable for production and can be a reason of unfavorable materials quantity variance.

However, someone other than purchasing manager could be responsible for materials price variance. For example, production is scheduled in such a way that the purchasing manager must request express delivery. In this situation the production manager should be held responsible for the resulting price variance.

A word of caution is in order. Variance analysis should not be used as an excuse to conduct witch hunts or as a means of beating line managers and workers over the head. The emphasize must be on control in the sense of supporting the line managers and assisting them in meeting the goals that they have participated in setting for the company. In short, the emphasize should be positive rather than negative. Excessive dwelling on what has already have happened, particularly in terms of trying to find someone to blame, can destroy morale and kill any cooperative spirit.

Relevant Articles:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing

 

 

 

 

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Financial Accounting Topics


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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Special Journals
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Bank Reconciliation Statement
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  Standard Costing and Variance Analysis
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  Capital Investment Analysis/Capital Budgeting
 
 

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