Direct Material Price Variance Calculator
Answers the Question
How much more did we spend for our direct materials that we expected?
Calculator for Direct Material Price Variance
What Is the Direct Material Price Variance?
This formula is critical for understanding how actual spending tracks against estimations.
Why Is it Important?
- Monitoring trends in the cost of goods is important so that burn rate can be estimated.
- Large deviations can indicate that estimators are using fundamentally unsound principles in the planning stage of their projects.
Formula(s) to Calculate Direct Material Price Variance
- DIRECT MATERIAL PRICE VARIANCE = ACTUAL QUANTITY * (ACTUAL PRICE - BUDGETED PRICE)
- Not considering all inputs into a final price, such as rebates, when calculating both estimates and actuals.
- Only considering absolute differences in total costs, rather than price shifts in each type of direct material. A long-term increase in the cost of one input may be hidden by short-term decreases in another.
- Encouraging buying of additional resources that have no immediate need in order to reduce unit costs. While this may make economic sense, it may also reduce available capital that can be put to more productive use.
- Assuming that the price paid is the best price possible. Sometimes better procurement teams can negotiate more aggressively or make use of alternative sourcing.
- Not considering the effect that changes to the quantity predicted may incur pricing penalties that can be avoided in the future.