How To Calculate and Evaluate Material Price Variance

Material Price Variance Calculator is a very helpful tool that gives instant calculation results of material price variances. It is the difference between the actual and standard cost of the material. A variance is favorable if the standard cost of material is higher than the actual cost. And it is unfavorable if the estimated cost is lower than the actual cost.

Here’s a process you can use to calculate material price variance:
  1. Determine the quantity of product used. …
  2. Find budgeted price and actual price. …
  3. Subtract actual price from budgeted price of materials per unit. …
  4. Multiply the result by the quantity of the product used. …
  5. Determine whether it’s favorable or unfavorable.

Material Price Variance | Explained with Examples

4 steps to calculate material price variance

Heres a process you can use to calculate material price variance:

1. Determine the quantity of product used

First, determine how many or how much of the product your company used. This may vary depending on whether youre measuring over a certain amount of time, over a products lifetime or for a material used in several of your organizations products. Service businesses may calculate material price variance for equipment or supplies that they use regularly.

Example: Crucial Croissants, a French bakery, wants to calculate price variance over a fiscal quarter for flour, which they use in most of their products. They go through their order records and see that they used 2,400 pounds of flour, or 48 50-pound bags of flour, during that time.

2. Find budgeted price and actual price

Next, find the budgeted price and the actual price for the item. The budgeted price, what you expected to pay, is sometimes called the standard price and may be available within a budget. The actual price is what your organization paid. You may find the actual price on a purchase order or invoice for the item.

Example: Crucial Croissants reviews their budget to find that they estimated they would spend $23 on each bag of flour. Invoices for the quarter show that they paid $20 per bag.

3. Subtract actual price from budgeted price of materials per unit

The variance is the amount that the price varied, so you can find it by subtracting the actual price from the budgeted price of materials to get the magnitude of the difference. Its important to make sure that both prices are measuring the same unit, weight or size so that you get an accurate comparison.

Budgeted price per unit of materials − actual price per unit of materials = price variance per unit

Example: Crucial Croissants hardworking accountant subtracts the actual price, $20 per bag, from the projected $23:

$23 − $20 = $3 variance per bag of flour

4. Multiply the result by the quantity of the product used

To complete the equation, enter the amount of product used and the variance per unit into the formula. This provides a total amount of variance from the original budgeted amount, and can be used to check financial reports or invoices to make sure the department or company is remaining on budget and that all costs and cost changes make sense with cash and spending totals.

Example: Crucial Croissants finds their total material price variance by entering both numbers into the material price variance formula:

Material price variance = quantity of materials used x price variance per unit

Material price variance = 48 bags of flour x $3 = $144 material price variance for flour over the fiscal quarter

What is material price variance?

Material price variance is the difference between calculated forecasts of how much a material costs and how much that material costs during actual use. It can be a good way to understand whether a certain product or process costs more or less than expected, which allows an organization to maintain its budget and compensate for changing costs. Many things may affect how a vendor prices their materials, including:

You can calculate material price variance with this formula:

Material price variance = quantity of materials used x (budgeted price per unit of materials − actual price per unit of materials)

3 steps to evaluate material price variance

Here are some steps you can take after you calculate material price variance to put it into context:

1. Determine whether its favorable or unfavorable

A positive material price variance is a favorable variance since it means that the actual price was lower than the budgeted price, and the company paid less than it expected. A negative material price variance means that the actual price was higher than the budgeted price, so thats considered an unfavorable variance. If the price for the materials changes frequently, you may find that the price variance switches back and forth from favorable to unfavorable, so its important to consider the amount of the variance when budgeting.

2. Find potential causes

Research can help you understand why the price varied from your forecast or expectation. Your own purchasing department may have secured a deal or discount that provided a favorable price variance. You may check with your suppliers to see whether they saw any changes in demand that could have changed their pricing system. You may be able to check general market trends to understand whether operational costs like labor, raw materials or transportation may have changed to cause them to pass on savings or extra costs to you.

3. Investigate material quantity variance

Finally, investigating material quantity variance can provide an additional context for the material price variance. Material quantity variance is the amount of material used per item. If the purchasing department decided to buy a more expensive material, for example, you may see an unfavorable material price variance, but if your manufacturing department uses less of the better material, your expenses per item may remain roughly the same.

Tips for using material price variance

Here are some tips for using material price variance to increase your organizations financial accountability and success:

Calculate promptly

It may be easier to find material price variance right when you receive the actual price rather than trying to do forensic accounting on your own records and tracking down prices months later. Keeping track of price variance can also help you adjust your working budget, so you might be able to reallocate funds as you go throughout a year or season to reflect new costs. You might set aside time every month or quarter to calculate or review your material price variances so that you dont forget.

Use relevant tools

Like many other accounting tasks, records management can make it easier to keep track of material price variance for all your vendors and supplies. You may use a physical system to handle paper invoices and receipts, or you may choose to use a digital system and scan or manually enter your information. Before committing to a single system, make sure to carefully consider your organizations needs and budget, and research your options.

Understand what price variance really tells you

As you consider how much you spend, its important to put the material price variance into context since its only one part of three important components: price variance, quantity variance and total direct materials variance. Heres how each is unique:

Each one has its own formula, so its important to understand which you need so you can use the right one for your situation.

FAQ

What is the formula for calculating material price variance and material usage variance?

The formula for this variance is:(standard quantity of material allowed for production – actual quantity used) × standard price per unit of material. (standard quantity of material allowed for production – actual quantity used) × standard price per unit of material.

What is the formula for calculating direct materials price variance?

The formula for this variance is:(standard price per unit of material × actual units of material consumed) – actual material cost. (standard price per unit of material × actual units of material consumed) – actual material cost.

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