Direct Material Price Variance

Direct material price variance (also called direct material spending/rate variance) is the difference between the actual amount spent on direct material purchases during a given period, and the amount that would have been spent, had the material been acquired at the standard price.

It may also be calculated as the product of:

  • the actual quantity of direct material purchased, and
  • the difference between the standard price and the actual price per unit of direct material.

Formula

As described in the definitions above, direct material price variance is calculated as follows:

Direct Material Price Variance
= Standard Price of Material Purchased − Actual Spending on Material
= AQ×SP − AQ×AP
= (SP − AP) × AQ

Where,
AQ is the actual quantity of direct material purchased;
SP is the standard unit price of direct material; and
AP is the actual price per unit of direct material;

Analysis

Direct material price variance is calculated to determine the efficiency of purchasing department in obtaining direct material at low cost. If calculated by subtracting the actual spending from the standard as shown in the above formulas, a positive value of direct material price variance is favorable, which means that the direct material was purchased for lesser amount than the standard price. A negative value of direct material price variance is unfavorable because it means that the price paid to purchase the material was higher than the target price.

However, a favorable direct material price variance is not always good; it should be analyzed in the context of direct material quantity variance and other relevant factors. It is quite possible that the purchasing department may purchase low quality raw material to generate a favorable direct material price variance. Such a favorable material price variance will be offset by an unfavorable direct material quantity variance due to wastage of low quality direct material.

Example

Calculate the direct material price variance if the standard price and actual unit price per unit of direct material are $4.00 and $4.10 respectively; and actual units of direct material used during the period are 1,200. Determine whether the variance is favorable or unfavorable.

Standard Price$ 4.00
− Actual Price4.10
Difference Per Unit− 0.10
× Actual Quantity1,200
Direct Material Price Variance− $ 120

Since the price paid by the company for the purchase of direct material exceeds the standard price by $120, the direct material price variance is unfavorable.

by Irfanullah Jan, ACCA and last modified on

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