Material Price Variance Formula
Material Price Variance
Formula is given below. The material price variance concept has been explained
with example.
Material
Price Variance = Actual quantity x (Standard price- Actual Price).
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Material Price Variance Formula Example
Actual
Quantity of Material Consumed = 7000 kg
Standard
Price per unit of Material = $ 7
Actual
Price or cost incurred on Material = 63,000
Calculate
Material Price Variance
Solution
Actual
Price = 63,000/7 = 9
Material Price Variance = Actual
quantity x (Standard price- Actual Price).
Material
Price Variance = 7000 (7 – 9)
=7000
(-2)
=-14,000 (Adverse Material Price
Variance)
Material Price variance
can be calculated as difference between standard price and actual price. This
Price difference is multiplied of actual quantity consumed during the
production. There are two possible situation, one standard price is high than
actual price, this is favorable situation, and second situation is standard
price is low than actual price, this is adverse situation.
Reasons for Favorable Material Price Variance
Reasons for favorable material price
variance includes deflation in the economy, using low quality material,
discount offered on bulk purchases, review of supply chain for lowering the
costs, high competition in the supply market , and the low demand of material
in the market.
Reasons for Adverse Material Price Variance
Reasons for adverse material price variance
include inflation in the economy, rise in the demand of material in the market,
withdrawal of major competitor from the market, artificial shortage of
material, real shortages due to natural disasters.
Significance of Material Price Variance
Material price variance immediately
reflects the price level of material consumed. Favorable material price variance
reflects the low price level than expectation or standard. Adverse material price variance reflects high
price level than expectations.
Adverse material price information can be
used to investigate the reasons for high level of price. Thus adverse material
price variance an effective tools for identifying and investigating the high
price level.
Favorable material price variance may used
to determine the reasons for low price level in the market. This favorable
material price variance is a tool of identifying and investigating low price
level.
Material Price Variance Formula Example
Quantity
Consumed (Actual) = 8000 kg
Unit
Standard price= $ 10
Actual
Price of material = 93,000
Calculate
Material Price Variance
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