Materials price variance (or direct materials price variance) is that part of materials cost variance which is due to difference between actual price paid and standard price specified for direct materials. It represents the difference between standard cost of actual quantity purchased and actual cost of these materials.
Although the materials price variance may not be controllable, it provides management with important information for the purpose of planning and decision making. The knowledge of this variance may prompt the management to increase product price, use substitute materials or find other offsetting sources of cost reduction.
The data relating to direct materials cost of Hampton Appliance Company for the month of January 2016 is given below:
- Actual price: $6 per unit
- Standard price: $5.25 per unit
- Actual quantity purchased: 5,000 units
Required: Calculate direct materials price variance of Hampton Appliance Company for the month of January 2016.
The direct materials price variance of Hampton Appliance Company is unfavorable for the month of January because the actual price paid to buy 5,000 units of direct material is more than the standard price.