Direct Material Price variance can be defined as the difference between the actual price of the materials used for the production purposes and the standard cost of the materials that are purchased for the production. The formula of direct material price variance can be shown as follows:-
Direct Material Price Variance = Actual quantity x Actual price – Actual quantity x Standard Price
Direct Material Price Variance = Actual cost – Standard cost of actual quantity
- Where actual quantity is the quantity of the material purchased during a period if the variance is also calculated at the time of material purchase
- Actual quantity is also the quantity of the material consumed during that accounting period if the variance is calculated at the time when the material was consumed
Direct material price variance indicates a number of things regarding the effective and ineffective usage of materials within a company. If the direct material variance is favorable it shows that the production management has used the material wisely and efficiently. There are several reasons of direct material price variance such as an overall decrease in the market price, purchasing cheap and low quality materials, negotiation on better price and implementing better procurement practices for the usage of materials.
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