Direct Material Price Variance
Direct material price variance (also called the direct material spending/rate variance) is the product of actual quantity of direct material used and the difference between standard price and actual price per unit of direct material. It is calculated using the following formula:
|DM Price Variance = ( SP − AP ) × AQ|
SP is the standard unit price of direct material
AP is the actual price per unit of direct material
AQ is the actual quantity of direct material used
Direct material price variance is calculated to determine the efficiency of purchasing department in obtaining direct material at low cost. A positive value of direct material price variance is favorable which means that direct material was purchased for lesser amount than the standard price. A negative value of direct material price variance is unfavorable because more than estimated price per unit is paid.
However, a favorable direct material price variance is not always good; it should be analyzed together with direct material quantity variance. 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.
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 Price||4.10|
|Difference Per Unit||− 0.10|
|× Actual Quantity||1,200|
|Direct Material Price Variance||− $ 120|
Since the price paid by the company for the purchase of direct material is more than the standard price by $120, the DM price variance is unfavorable.
Written by Irfanullah Jan