The direct material price variance measures the difference between the actual cost of materials incurred and the budgeted cost of materials, given the actual quantity purchased. To calculate this variance, you can use the following formula:
Direct Material Price Variance = (Actual Price – Standard Price) × Actual Quantity Purchased
1. **Actual Price**: This is the price per unit that you actually paid for the materials.
2. **Standard Price**: This is the budgeted or expected price per unit for the materials.
3. **Actual Quantity Purchased**: This is the total number of material units purchased during the period.
Example:
Suppose you purchased 1,000 pounds of material at an actual price of $5.00 per pound, while the standard price was $4.50 per pound. To find the variance:
Direct Material Price Variance = ($5.00 – $4.50) × 1,000
Calculating this gives:
Direct Material Price Variance = $0.50 × 1,000 = $500
This means you have an unfavorable variance of $500, indicating that you paid more for materials than what was planned. Understanding this variance can help businesses manage costs and price more effectively.