In managerial accounting, variance means deviation of actual costs from standard costs. Materials price variance is the result of deviation of
actual price paid for materials from what has been set as standard. Direct materials price and quantity standards are set after keeping in mind the current market prices and anticipated changes in materials prices in near future. However things do not always happen as expected and therefore, the actual price of materials purchased and used may significantly
deviate from standard price. Moreover, the expenses associated with the order (like freight, duties, handling expenses etc.) may increase or reduce the ultimate price of materials available for use in a manufacturer’s stock. A business may, therefore, have to pay more or less price than what has been considered as normal at the time of setting standards (see direct
materials price and quantity standards article). If the actual price paid for materials is more than the standard price, an unfavorable materials price variance occurs. On the other hand, if the actual price paid for the materials is less than the standard price, a favorable materials price variance occurs. The formula of direct materials price variance is given below: Direct materials price variance = (Actual quantity purchased × Actual rate) – (Actual quantity
purchased × Standard rate) ExampleThe Aptex company manufactures and sells small speakers that are used in mobile phones. The speakers are sold in bulk to mobile manufacturing companies where complete mobiles are produced. The direct material of Aptex 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: Direct materials (1 meter × $1.50
per meter): $1.50 During the month of June, 2016, Aptex purchased 5,000 meters of copper coil @ $1.70 per meter and produced 2,500 speakers using 3,000 meters of copper coil. Required: Calculate direct materials price variance for Aptex company for the month of June, 2016. Solution:Direct materials price variance = (Actual quantity purchased × Actual rate) – (Actual quantity purchased × Standard rate) = (5,000 × $1.70) – (5,000 × $1.50) Aptex has an unfavorable materials price variance for June because the actual price paid ($8,500) is more than the standard price allowed ($7,500) for 5,000 meters of copper coil. This variance can also be computed by using the factored form of above formula: = AQ × (AR – SR) Reasons of direct materials price variance:A favorable or unfavorable materials price variance may occur due to one or more of the following reasons:
Responsibility of direct materials price variance:Purchasing department is responsible to place orders for direct materials so this variance is generally considered the responsibility of purchase manager. However, the above reasons clarify that the materials price variance may or may not be the result of inefficiencies of the purchasing department. The occurrence of variances is very normal in both manufacturing and service business. They occur for almost all cost elements and should not be used to find someone to blame. Sometimes they may not be very significant in amount and sometimes they may be the result of factors that are beyond the control of managers. Variances are tools to control costs and improve operating efficiencies They should, therefore, be used positively and in a broader sense. More from Standard costing and variance analysis (explanations): Who is generally responsible for the materials price variance?4. In general, the purchasing agent is responsible for the material price variance.
Who is generally responsible for the labor efficiency variance?The labor efficiency variance generally is also the responsibility of the production managers and supervisors. 8-6 The materials price variance can be computed either when materials are purchased or when they are placed into production. It is better to compute the variance when materials are purchased.
Which department is customarily held responsible for an unfavorable materials price variance?price variance. Which department should usually be held responsible for an unfavorable materials price variance? Purchasing.
What is the material price variance quizlet?The Material Price Variance is the difference between the actual and the budgeted cost for materials multiplied by the actual quantity used. The Material Quantity Variance is the difference between the actual amount of materials used and the amount of materials expected to be used multiplied by the standard cost.
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