Question

What circumstances may cause the purchasing department to be responsible for both an unfavorable material price variance and an unfavorable materials quantity variance? Explain giving example.

Answer 1

Unfavourable Material Price Variance

The Unfavourable Material price variance means the actual price paid for thematerials is more than the standard price. On the other hand , if it is less than the standard price, a favourable materials price.

The difference between the actual cost and standard cost is called variables. The variable could either favourable or unfavourable. The Standard material price usually estimated based on past, present and expected future and take into the consideration ecnomic order quantities,supplier price quotes and market.

material Price variance Formula is

=(standard price - actual Price) X actual quantity

Unfavourable Material Quantity Price Variance

If the actual quantity used is greater than the standard quantity, the variance is unfavorable. The Material quantity is difference between the actual quantity of material  used to at the standard price and the standard quantity material allowed at the standard price.

Material Quantity Variance Formula

=(Standard Quantity-Actual quantity) X Standard Price

The both unfavourable Material Price variance & material quantity Variance may occur due to one or more of the following circumstances

1) Order Size:- Some suppliers allow discount on large orders. the materials purchased in large orders. the material purchased in large quantity may reduce the unit price and favorable price may occur.

2) Rise in price: - The Rise in the general price level may increase the input costs of the vendor and as a result vendor may increase the price of the materials. The rise in price is very common reason of an unfavorable variance.

3) Urgent needs:-If the production Department doesnot indicate the need of materals on time, the purchasing department may have to order on urgentbasis that may increase the price of materials.

4) Quality:- A favourable price variance may be the result of purchasing low quantity materials and unfavorable variance may be the result of purchasing high quality materials.

5) Transportation:- Any changes in the transportation expenses can change the total and per unit cost of materials available for use and canbecome the reason of favorableor unfavorable variance.

6)Inefficient or Unreliable suppliers:- A supplier deviation from sandardmaterial costs may be the result of inefficient or unreliable vendors.

For example, if suppliers of raw materials are unable to meet the demand, the company may have to look for another suppliers who may be more costly.

Example

The Aptex company manufactures and sells small speakers that are used in mobile phones. the speakers ae sold in bulk to mobile manufacturing companies where mobiles produced. the material of appex company is a thin copper coil. One meter of the copper coil is the standard requirement to manufacture one speaker

the standard cost to manufacture one speaker is as follows

materials(1meter x 1.50 per meter)

dierct labour-1.00

during the month of jun Aptex purchased 5000 meters of copper coil@ 1.70 per meter and produced 2500 speakers using 3000 meters of copper coil

calcualte materils price variance of aptex company

Material Price variance=(Actual Quantity purchased x Actual rate) -(Actual quantity Purchased x standard rate)

=(5000x1.70)-(5000-1.50)

=8500-7500=1000 unfavourable

Aptex has a unfavourable material price variance for June because the actual price paid (8500) is more than the standard price allowed(7500) for 5000 meters of copper coil.