Material Price Variance Calculator

Material Price Variance

Material Price Variance Calculator is a very helpful tool which gives instant calculation result 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.

Formula for Calculating Material Price Variance

We subtract the standard cost of material from its actual cost to calculate material price variance. The formula for calculating material price variance is as follows:

Material Price Variance = AQ * (SP – AP)

where, AQ = Actual Quantity,

AP = Actual Price,

and, SP = Standard Price.

About the Calculator / Features

The calculator provide a quick result of calculation simply by inserting following details in the calculator:

  • Actual quantity
  • Actual price
  • Standard price

Material Price Variance Calculator

Material Price Variance Calculator

How to Calculate using Calculator

The user simply has to put the following details into the calculator to obtain the result of material price variance.

Actual Quantity

It is the actual quantity of material purchased by the purchasing department. This could be different from the standard quantity due to defects, wastages, or other reasons.

Actual Price

It is the actual price or we can say the cost we have paid for purchasing material. Management always tries to purchase materials at a lower price. However, there could be reasons for the difference between the actual price of the material and its standard price. These reasons could be emergency purchases, purchase of excessive or deficit quantity, price rise, new taxes, etc.

Standard Price

It is the price of the material that the management estimates at the start of the period. The aim behind establishing standards is to compare the actual performance with the pre-determined results. And make it a reference and drive and monitor to see that actuals remain as near as possible to the standard estimates.

Example of Material Price Variance

Let us try to understand this concept using an example.

Case 1: Suppose a manufacturing concern ‘X Ltd.’ purchased 1,500 units of material ‘A’ @ $ 5 per unit. However, the standard price/estimated price of the material is $ 4.5 per unit.

Actual Quantity1,500 units
Actual Price ($)5 per unit
Standard Price ($)4.5 per unit

Material Price Variance = 1,500 * ($4.5 – $5) = $750 (A) – Adverse Variance

Case 2: Assume that in the above example the standard price is $ 5.7 per unit instead of $ 4.5 per unit.

Actual Quantity1,500 units
Actual Price ($)5 per unit
Standard Price ($)5.7 per unit

Material Price Variance = 1,500 * ($5.7 – $5) = $1050 (F) – Favourable Variance

Interpretation of Material Price Variance

A favorable variance is denoted by (F) and an unfavorable or adverse variance is denoted by (A). Material price variance determines the performance of the purchasing department in procuring materials. A favorable variance is treated as good. But there could be the other side of the coin too. It could be favorable if the material is of low quality whereby the actual consumption may go up substantially. Similarly, unfavorable variance could be the result of bad management which may increase the cost of handling material, purchasing at a short notice, frequent purchase of small quantities, not able to negotiate proper pricing or volume discounts, etc.

Cautions

In order to avoid unfavorable variances, management has to keep certain things in mind. They have to follow a more realistic approach while establishing standards or preparing budgets. Reduction of waste, reverifying the items where there is an unfavorable variance and various other steps are required to be taken.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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