Question

direct material price variance

Answer 1

Before understanding Material Price Variance, we must understand what is Material Variance

Material Variance

Material Variance analysis is difference between the budgeted cost of direct material and actual cost of direct material. Reason for such difference are price change and usage change.

Material Price Variance

Material Price Variance analysis is the difference between the budgeted price of rawmaterial and actual cost of rawmaterial.

Formula

Material Price Variance = (Actual Quantity X Standard Price) - (Actual Quantity X Actual Price)

Example

If X.ltd produced 25000unit of finished good,rawmaterial consumption budgeted 2kg at $3per kg. Actual cost incured per kg $3.5. Compute Material Price Variance.

Material Price Variance = (Actual quantity X Standard price) - (Actual Quantity X Actual Price)

= Actual Quantity = 25,000units X 2kg = 50,000kg

= Standard Price = $3per kg

= Actual Price = $3.5per kg

Material Price Variance = ( 50,000kg X $3per kg) - (50,000kg X $3.5per kg)

= ($150,000 - $175,000)

= $ 25,000 Adverse