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.
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.
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.