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Materials Price Standard:

Usually two standards are set for direct materials costs. These are:

  1. A materials price standard.

  2. A materials quantity (or usage) standard.

Materials price standard is discussed here. Materials quantity standard is discussed on materials quantity standard page.

Direct materials price standards permit:

  1. Checking the performance of the purchasing department and the influence of various internal and external factors.

  2. Measuring the effect of price increase or decrease on the company's profits.

Determining the price or cost to be used as the standard cost is often difficult, because the price used are controlled more by external factors than by a company's management. Prices selected should reflect current market prices and are generally used throughout the forthcoming fiscal period. The standard price for direct materials should reflect the final, delivered cost of the materials, net of any discounts taken.


Following is an example of the calculation of standard price per unit for direct materials:

Purchase price, top-grade pewter ingots, in 40-pound ingots $3.60
Freight, by truck, from the supplier's warehouse 0.44
Receiving and handling 0.05
Less purchase discount (0.09)
Standard price per pound $4.00

In above example the standard price reflects a particular grade of materials (top grade), purchased particular lot size (40-pond ingots), and delivered by a particular type of carrier (truck). Allowances have also been made for handling and discounts. If every thing proceeds according to these expectations, the net cost of a pound of pewter should therefore be $4.00.

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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