How Well Do You Know Your Direct Materials Price Variance?

What is direct materials price variance?

Can you calculate the direct materials price variance based on the given data?

Direct Materials Price Variance Explanation:

Direct materials price variance is the difference between the actual cost of direct materials and the standard cost of direct materials. It shows the difference between the amount that was actually paid for direct materials and the amount that should have been paid as per the standard price.

Direct Materials Price Variance = (Actual Quantity Purchased × Actual Price) – (Actual Quantity Purchased × Standard Price)

The company developed per-unit standards for its product with 4 gallons of direct materials at $10 per gallon. Last month, they purchased 5000 gallons of direct materials for $48500. The direct materials price variance for last month was $1500 favorable.

Standard cost of direct materials = 4 gallons at $10 per gallon = $40 per unit

Actual quantity of direct materials purchased last month = 5000 gallons

Actual price of direct materials purchased last month = $48500

Therefore, Actual cost of direct materials purchased = 5000 × $9.70 = $48,500

Direct Materials Price Variance = 5000($9.70 – $10.00) = $1500 favorable

Therefore, the direct materials price variance for last month was $1500 favorable.