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. Show
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:
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:
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:
When the standard price is higher than the actual price the materials price variance is?Variance is unfavorable because the actual price of $1.20 is higher than the expected (budgeted) price of $1. $(21,000) favorable materials quantity variance = $399,000 – $420,000.
...
Learning Objective.. When the actual quantity of materials used is less than the standard quantity allowed the material quantity variance is labeled as?If there is no difference between the actual quantity used and the standard quantity, the outcome will be zero, and no variance exists. If the actual quantity of materials used is less than the standard quantity used at the actual production output level, the variance will be a favorable variance.
When the actual price paid for the material is more or less than the standard price specified the difference is known as?The difference between the actual price and the standard price, multiplied by the actual quantity of materials purchased is the material price variance. 24.
When the actual price is lower than standard price?When the actual cost differs from the standard cost, it is called variance. If the actual cost is less than the standard cost or the actual profit is higher than the standard profit, it is called favorable variance.
|