Concepts behind Material Price Variance

Material Price Variance is a subcategory of Variance Analysis in which the variance is calculated for the price of the materials consumed or used for production.

In Material Price Variance, the variation is calculated by deducting the price of the materials as per planned standards from the price of the materials that was actually incurred. The difference arising is referred to as Material Price Variance.

There are two main components of Material Price Variance which are the price of the materials as well the quantity of the materials.

Calculation of Material Price Variance:

MPV = (SP - AP) x Q

Where,

MPV is Material Price Variance

SP is Standard or Estimated Price

AP is Actual Price

Q is quantity

The main purpose of calculating Material Price Variance is to determine how efficient the purchase department of a company is in obtaining the materials at the lowest possible cost.

If the value of the Material Price Variance is positive, it implies that the materials were purchased at a cost which was lower than what was estimated. If the value of the Material Price Variance is negative, it implies that the materials were purchased at a cost which was higher than what was estimated.

There can also be an alternative observation for the positive or negative value of Material Price Variance. It could also imply the quantity which was estimated at the beginning while setting standards has a variation which at times may be favorable and at times can be unfavorable.

There can be a lot of causes and reasons why the Material Price Variance is positive or negative.

Let us see a few of the causes for favorable and unfavorable Material Price Variance:

Causes for positive material Price variance:

• A decrease in the prices of the raw materials in the business environment.
• Bargaining in the prices or obtaining discounts in the price of the raw materials by the purchase department.
• Purchasing inferior quality products instead of the quality decided upon during planning.
• Saving on cost by purchasing in bulk
• Saving on cost by making cash payments and obtaining cash discounts.
• Using practices which lead to a cheaper cost for materials followed by the purchase department.

Causes for a negative material Price variance:

• An increase in the price of the raw materials in the market
• Suppliers refusing to provide any kind of discount on the goods and raw materials.
• Purchasing higher quality products instead of the one specified while setting budgets.
• Ordering raw materials in small quantities allowing for no room to get any discounts.
• Buying goods in credit which does not allow for any cash discounts.
• Purchase department using inadequate practices which are not efficient leading to a high cost for raw materials.

One of the most essential parts of Material Price Variance is the calculation of standard Material Prices. The prices need to be in sync with the changing business environment and should consider inflation and price hikes while calculating.

Difficulties Encountered In Material Price Variance

While calculating Material Price Variances, a lot of factors have to be kept in mind. In order to calculate difference in the Standard or estimated prices. At times, the prices are given in either unit wise or as a sum total. Depending on the question, there needs to be calculation of the standard price in terms of the solution to the problem.

The numbers are usually complex and require lot calculations in order to arrive to the variation in the material price or material price variance.

Also, the factors like quantity and other transactions affecting the price of the raw material are confusing in the problems and make the students baffled as to what value is to be used for what element. At times, there may be one or the other element missing from the problem and requires efforts in finding that element as well within the solution.

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