Materials price variance

Materials price variance

The materials price variance is the difference between the standard purchase price and the actual purchase price for the actual quantity of direct materials purchased. The materials price variance typically uses the actual quantity of direct materials purchased, rather than the quantity deployed to production.

The purchased-quantity basis is preferred because it isolates the purchasing department’s responsibility - the factors it controls, like negotiating prices and managing supplier relationships - and because it flags a price problem as soon as materials are bought, rather than waiting until they’re used in production. Using the quantity deployed to production is also valid, though it shifts the focus away from purchasing. If a question specifies which quantity to use, follow that; otherwise, assume the quantity purchased. The formula for calculating materials price variances is:

$$\text{Materials price variance}=\text{Actual quantity in standard prices}-\text{Actual cost}$$

It can also be expressed in terms of the formulas:

$$\begin{array}{rl}\text{Materials price variance}& =(\text{SP}\times \text{AQ})-(\text{AP}\times \text{AQ})\\ & =(\text{SP}-\text{AP})\times \text{AQ}\end{array}$$

Where:

• $\text{AP}$ is the actual price per unit of direct material
• $\text{SP}$ is the standard price per unit of direct material
• $\text{AQ}$ is the actual quantity of direct materials purchased (or used in production)

Example: Materials price variance

Standard price: $4.00/kg. Purchased 10,000 kg at $4.20/kg; used 9,000 kg in production.

Based on quantity purchased (preferred basis):

$$(\$4.00-\$4.20)\times 10,000=-\$2,000$$

Based on quantity used, if a question specifies it:

$$(\$4.00-\$4.20)\times 9,000=-\$1,800$$

Answer: $2,000 unfavorable (quantity purchased); $1,800 unfavorable (quantity used).

When applying inputs into the formula, a positive variance indicates a favorable variance, while a negative variance signifies an unfavorable variance. For example, if actual prices exceed standard prices, it results in an unfavorable variance, as higher actual costs negatively impact the company’s financial performance.

Common causes of a materials price variance include supplier price or market changes, lost or gained bulk discounts, rush or expedited freight, buying an off-spec grade of material, or an outdated standard. Investigate significant variances, then renegotiate, correct the sourcing issue, or revise the standard if the market has shifted permanently.