Direct materials price variance is an integral part of cost accounting that you must understand as a student. If you are also the owner of/an accountant in a manufacturing facility, you equally need to pay close attention to this variance since you’ll frequently deal with it in delivering your duties.
This article seeks to enlighten you on direct materials price variance.
If you’re ready to learn this topic.
Let’s cut to the chase.
DMPV as it is also called is measured when there is a difference between the price paid for the purchase of direct materials.
To put it simply, DMPV refers to the discrepancy between the actual amount of money paid per unit of direct materials purchased during a particular time period and the amount that ought to have been paid per unit if the direct materials were purchased at standard prices.
From the definition above, we can draw up the formula for direct materials price variance to be like this:
Direct materials price variance = (SP – AP) x AQ
SP is the Standard Price per unit
AP is the Actual price paid per unit
AQ is the Actual Quantity purchased at the actual price.
If the standard price is lower than the actual price paid, then your direct materials price variance will be unfavourable. However, if the standard price is higher than the actual price, it will be favourable.
Here is an illustration to drive home the point of direct material price variance:
Moses and Sons is a registered business engaged in the manufacture of automobiles. The procurement manager recently purchased 2,000 units of Chemical B, a key direct material used in the manufacture of its automobiles and pays $4 per unit instead of an estimated $6 per unit. This means the direct material price variance experienced by the manufacturer is:
Direct Material Price Variance = (SP – AP) x AQ
Standard price = $6
Actual price = $4
Actual Quantity = 2,000 units
Therefore, DMPV = ($6 – $4) X 2000 units = $4000 favourable.
What Are The Causes Of This Variance?
- The major cause for direct materials price variance is paying a lower or higher sum for a given quantity of direct materials than initially planned. And this could result from any of the following instances:
- Emergency purchases.
- Excessive demand or supply of the direct material resulting in either higher or reduced price.
- Efficient purchasing procedure or otherwise and so on
- New government policy affecting market conditions.
- The effect of change in the discount policy of suppliers.
- Differences in the quality of direct materials alternatives may also be a reason.
- The unavailability of your direct materials choice could mean you have to settle for alternatives which may lead to price variance.
Importance Of Direct Material Price Variance
- It aids the decision making of organizations especially when it comes to purchases.
- DMPV assists organizations, especially the procurement department when budgeting.
- It helps organizations when analyzing performance.
- This variance is likely that the reporting manager manipulates the data to achieve a desirable result.
- It may serve as a source of motivation for the workers.
These are essential things to know about direct material price variance. I hope you find this article useful, you can drop your questions as comments, I look forward to answering them.