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). |
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
No comments:
Post a Comment