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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

A D V E R T I S E M E N T

 Financial Accounting Topics Introduction to Accounting ---------------------------------------------------------------------------- Transactions and Accounting Equation ---------------------------------------------------------------------------- Analysis of Business Transactions ---------------------------------------------------------------------------- Journal, Ledger and Trial Balance ---------------------------------------------------------------------------- Accounting for Bills of Exchange ---------------------------------------------------------------------------- Special Journals ---------------------------------------------------------------------------- Cash Book ---------------------------------------------------------------------------- Bank Reconciliation Statement ---------------------------------------------------------------------------- Final Accounts ---------------------------------------------------------------------------- Work Sheet ---------------------------------------------------------------------------- Capital and Revenue Items ---------------------------------------------------------------------------- Valuation of Inventories ---------------------------------------------------------------------------- Accounts of Non-profit Making Organizations ---------------------------------------------------------------------------- Statement of Cash Flows ---------------------------------------------------------------------------- Accounting Ratios Analysis ---------------------------------------------------------------------------- Depreciation, Provisions and Reserves ---------------------------------------------------------------------------- Accounting Dictionary ---------------------------------------------------------------------------- Financial Calculators

 Managerial Accounting Topics Financial Statements ---------------------------------------------------------------------------- Cost Volume Profit Relationship ---------------------------------------------------------------------------- Variable Costing System ---------------------------------------------------------------------------- Materials and Inventory Cost Control ---------------------------------------------------------------------------- Activity Based Costing System ---------------------------------------------------------------------------- Standard Costing and Variance Analysis ---------------------------------------------------------------------------- Balanced Scorecard ---------------------------------------------------------------------------- Capital Investment Analysis/Capital Budgeting