Direct Material Price Variance Formula Example Analysis PDF

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Price Variance Formula example for final...

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Direct Material Price Variance | Formula | Example | Analysis

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Material Price Variance

Definition Direct Material Price Variance is the difference between the actual cost of direct material and the standard cost of quantity purchased or consumed.

Formula Direct Material Price Variance: = Actual Quantity x Actual Price

-

Actual Quantity x Standard Price

=

-

Standard Cost

Actual cost

Where: Actual Quantity is the quantity purchased during a period if the variance is calculated at the time of material purchase Actual Quantity is the quantity consumed during a period if the variance is calculated at the time of material consumption

Example https://accounting-simplified.com/management/variance-analysis/material/price.html

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Material

Quantity

Actual Price

Standard Price

Limestone

100 tons

$75/ton

$70/ton

Clay

150 tons

$20/ton

$24/ton

Sand

250 tons

$10/ton

$12/ton

Material Price Variance will be calculated as follows: Step 1: Calculate Actual Cost Actual Cost = Actual Quantity x Actual Price Limestone:

100 tons

x

$75

=

$7,500

Clay:

150 tons

x

$20

=

$3,000

Sand:

250 tons

x

$10

=

$2,500

Step 2: Find the Standard Cost of Actual Quantity Standard Cost = Actual Quantity x Standard Price Limestone:

100 tons

x

$70

=

$7,000

Clay:

150 tons

x

$24

=

$3,600

Sand:

250 tons

x

$12

=

$3,000

Step 3: Calculate the Variance Material Price Variance = Actual Cost (Step 1) - Standard Cost (Step 2) Limestone:

$7,500

-

$7,000

=

($500)

Adverse

Clay:

$3,000

-

$3,600

=

$600

Favorable

Sand:

$2,500

-

$3,000

=

$500

Favorable

$600

Favorable

Total Price Variance

Analysis A favorable material price variance suggests cost effective procurement by the company. Reasons for a favorable material price variance may include: An overall decrease in the market price level Purchase of materials of lower quality than the standard (this will be reflected in adverse material usage variance) Better price negotiation by the procurement staff Implementation of better procurement practices (e.g. invitation of price quotations from multiple suppliers) Purchase discounts on larger orders https://accounting-simplified.com/management/variance-analysis/material/price.html

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Reasons for adverse material price variance include: An overall hike in the market price of materials Purchase of materials of higher quality than the standard (this will be reflected in favorable material usage variance) Increase in bargaining power of suppliers Loss of purchase discounts due to smaller order sizes Inefficient buying by the procurement staff

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MCQ

Test Your Understanding Fresh PLC is a manufacturer of toothpaste. One of the ingredients of Fresh Toothpaste is sodium fluoride powder. During a period, Fresh PLC purchased 10,000 KG of sodium fluoride at the cost of $20,000 ($2 per KG). Further information includes the following: -Standard price of sodium fluoride is $1.5 per KG -Fresh PLC was only able to use 9,000 KG of the material during the period -Fresh PLC values stock on standard cost basis What is the material price variance? $4500 Adverse $5,000 Adverse

32

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John • 5 years ago

I believe the information is incorrect in that no brackets should surround favourable figures. The brackets symbolise negative value and therefore should be surrounding adverse results. Can anyone else confirm this? • Reply • Share › AccountingSimplified

Mod

> John • 5 years ago

Thanks for posting John. Favourable material price variance has the effect of reducing material cost which is why they are presented in brackets. However, showing adverse amount in brackets is probably a better presentation as it is more in line with the way budgets are reconciled with actual performance, i.e. favourable variances are added to budgeted profit while adverse variances are subtracted. We will update our website soon to reflect the better presentation. Our bad. And thanks for your input. • Reply • Share › Mylo • 5 years ago

Why are the favourable amounts in brackets ? Adverse amounts are supposed to be bracketed as they are negative figures in the budgets. • Reply • Share › AccountingSimplified

Mod

> Mylo • 5 years ago

Thanks for posting Mylo. Favourable material price variance has the effect of reducing material cost which is why they are presented in brackets. However, showing adverse amount in brackets is probably a better presentation as it is more in line with the way budgets are reconciled with actual performance, i.e. favourable variances are added to budgeted profit while adverse variances are subtracted. We will update our website soon to reflect the better presentation. Our bad. And thanks for

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Introduction to Management Accounting Management Accounting Concepts Variance Analysis Introduction Limitation of Standard Costing and Variance Analysis Direct Material Price Variance Direct Material Usage Variance Direct Material Mix Variance Direct Material Yield Variance Direct Labor Rate Variance Direct Labor Efficiency Variance Direct Labor Idle Time Variance Sales Price Variance Sales Volume Variance Sales Mix Variance https://accounting-simplified.com/management/variance-analysis/material/price.html

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