How is the direct material price variance calculated?

The calculation of the direct material price variance is based on the difference between the actual price paid for materials and the standard price that was expected to be paid, multiplied by the actual quantity of materials purchased. By using the formula of actual quantity purchased multiplied by the difference between actual price and standard price, this method effectively highlights how much of the variance is due specifically to paying a different price than anticipated.

This variance serves as an important indicator for managers to identify whether they are overspending or making savings when procuring direct materials. A favorable variance indicates that materials were purchased for less than the standard price, while an unfavorable variance indicates that the materials cost more. Understanding this variance helps management take actionable steps regarding purchasing decisions and vendor negotiations in order to control costs more efficiently.