Materials price variance (or direct materials price variance) is the part of materials cost variance that is attributable to the difference between the actual price paid and the standard price specified for direct materials.

Materials price variance represents the difference between the standard cost of the actual quantity purchased and the actual cost of these materials.

Although materials price variance may not be controllable, it provides management with important information for planning and decision-making purposes.

Knowledge of this variance may prompt a company’s management team to increase product prices, use substitute materials, or find other offsetting sources of cost reduction.

Formula

Materials Price Variance Formula

Example

The data relating to the direct materials cost of Hampton Appliance Company for the month of January 2016 is given below:

  • Actual price: $6 per unit
  • Standard price: $5.25 per unit
  • Actual quantity purchased: 5,000 units

Required: Calculate the direct materials price variance for Hampton Appliance Company for the month of January 2016.

Solution

Materials Price Variance Calculation
The direct materials price variance of Hampton Appliance Company is unfavorable for the month of January. This is because the actual price paid to buy 5,000 units of direct material exceeds the standard price.

Frequently Asked Questions

What is the formula to calculate the direct materials price variance?

The standard cost of actual quantity purchased is calculated by multiplying the standard price with the actual quantity. This amount will represent the expected expenditure on direct material for this many units. The difference between this actual expenditure and the actual expenditure on direct material is the direct materials price variance.

What is the definition of a direct materials price variance?

Direct material price variance (DM Price Variance) is defined as the difference between the expected and actual cost incurred on purchasing direct materials. It evaluates the extent to which the standard price has been over or under applied to different units of purchase.

What is the formula for the direct materials price variance?

Direct materials price variance = (Standard Price - Actual Price) * Actual Quantity

What is the interpretation of a direct materials price variance?

The difference between the expected and actual cost incurred on purchasing direct materials, expressed as a positive or negative value, evaluated in terms of currency. It evaluates the extent to which the standard price has been over or under applied to different units of purchase.

What are the direct materials price variance accounts?

Direct materials price variance account is a contra account that is debited to record the difference between the standard price and actual price of purchase. It shows negative value on company's books.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.