What is Material Price Variance?
Material Price Variance is the part of direct material cost variance.
According to ICMA, London,
“It is that portion of the direct material cost variance which is due to the difference between the standard price specified and the actual price paid”.
Formula to calculate material price variance
The following formula is used to calculate material price variance.
Material Price Variance = AQ (SP — AP)
- AQ = Actual Quantity
- SP = Standard Price
- AP = Actual Price
If standard price is more than actual price, the variance will be favorable and on the other hand if standard price is less than the actual price, the variance will be unfavorable or adverse.
Causes for Direct Material Price Variance
The causes for direct material price variances are classified into two categories such as
- causes beyond the control of management and
- causes within the control of management.
Causes Beyond the Control of Management
1. Changes of Prices (increase / decrease) in the market.
2. Agreement with suppliers as to raise or reduce the price.
3. Govt. may interfere the price of materials as a policy.
4. High or low transportation cost.
Causes within the control of Management
1. Efficiency or inefficiency in purchasing.
2. Loss of cash discount since the payment is not made within specified period.
3. Purchase of small quantities with high price.
4. Purchase of large quantities with low price.
5. Economic ordering quantity is not followed.
6. Purchase of sub-standard quality of materials.
7. Careless, shortsightedness and manipulative practices by the purchase department.
8. Emergency purchase.
9. Failure to secure trade discount on purchase.
10. Failure to purchase materials at proper time.
11. Incorrect setting of standards.