Material Price Variance | Meaning | Formula | Causes

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)

Where,

  • 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

  1. causes beyond the control of management and
  2. 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.

Related Post

Zero based budgeting | Stages | Advantages | Disadvantages Understanding Zero based budgeting Zero based budgeting is used as a managerial tool to control the costs. It got popularity since the early 1970's. ...
Yardsticks for ratio analysis An efficiency of an individual can be assessed only by fixing the standard. If not so, the concerned individual has no option of knowing his level of ...
Working capital | Operating Cycle or Circular Flow Concept Working Capital Working capital refers to a part of sources of funds of a business concern used for financing short term purposes or current assets s...
Working capital | Meaning | Needs | Balance Sheet Concept What is working capital? Working capital is the amount used to meet the day to day operation activities of a business. In the broad sense, the term w...
Who is a Management Accountant | Role in Management The management accounting system provides highly useful economic and financial data to the management. A channel is used to transmit the information e...
Who is a Budget Officer? | What are his Duties or Functions? Who is a Budget Officer? Budget Officer is a head of Budgetary Control Organization. He/she may be otherwise called as the Budget Director or Budget ...

Leave a Reply