Question

What does a positive and negative direct material price variance mean? Explain in details using examples and ensure to go beyond stating only favourable or unfavourable variances ?

Answer 1

Direct material price variance shows the difference between Actual cost of direct material purchased and the cost of material purchased at a standard price for a given period.

A favorable variance (positive) means that actual price is lower than standard price

A unfavorable variance (negative) means that actual price is greater than standard price .

For Example:

Co. XYZ purchase 8000pounds of direct material at $ 6 per pounds .The co. budgeted for 2 pounds per unit at 6.5 per pound

Material price variance =Actual quantity [Actual price per pound- standard price per pound]

                               = 8000 [6 -6.50]

                              =8000 * -.50

                              = - 4000 Favorable

Here in this example ,The actual price is lower than standard price as budgeted resulting in favorable variance

Case 2 :Say if budgeted price is $ 5 per pound :

Material price variance = 8000 [6-5]

                            = 8000 *1

                            = 8000 Unfavroable

Here in this example ,The actual price is higher than standard price as budgeted resulting in Unfavorable variance.