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    ParrotBird48516's Avatar
    ParrotBird48516 Posts: 28, Reputation: 1
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    #1

    Jun 25, 2012, 11:30 AM
    Materials Price Variance
    If a company establishes that its per unit standard for its product is 3 kilograms of direct materials at $2 per kilogram, when you are calculating the materials price variance, do you use $2 as your standard price, or $6, as the unit standard was given as 3 kilograms.
    My original take was to use the $6, but further reseach suggests that it is the per/pound amount that is used. I am not sure why this is the case if the standard given was 3 kilograms, but that is what the literature is leaning towards. Clarification is please requested.
    The formula I am using is (actual - standard) x quantity purchased. Obviously, the answer varies quite a bit if the wrong value is used.
    Thank you,
    Parrot
    paraclete's Avatar
    paraclete Posts: 2,706, Reputation: 173
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    #2

    Jun 25, 2012, 05:44 PM
    Quote Originally Posted by ParrotBird48516 View Post
    If a company establishes that its per unit standard for its product is 3 kilograms of direct materials at $2 per kilogram, when you are calculating the materials price variance, do you use $2 as your standard price, or $6, as the unit standard was given as 3 kilograms.
    My original take was to use the $6, but further reseach suggests that it is the per/pound amount that is used. I am not sure why this is the case if the standard given was 3 kilograms, but that is what the literature is leaning towards. Clarification is please requested.
    The formula I am using is (actual - standard) x quantity purchased. Obviously, the answer varies quite a bit if the wrong value is used.
    Thank you,
    Parrot
    Hi

    When you establish a standard it is usual to express it in terms of the lowest denominator. As the weight is expressed in Kg then in this case that is 1 Kg so the standard cost of materials is in fact $6 but the standard price for the material is $2 per Kg.

    This is done so a price variation can be calculated as well as a volume variation for the materials used
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