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:
- Delaying the
computation of price variance until materials
are used would result in less timely variance
reports.
- 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
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