ABC Company has set the following standards for one unit of product: Direct materials: 0.5 pounds @ $1.00 per pound; Direct labor: 1 hour @ $10.00 per hour. The company produced 35,000 units and had the following actual costs: Direct materials: 18,000 pounds at a total cost of $17,280; Direct labor: 36,000 hours at a total cost of $374,400. Compute the direct materials price variance.
Question
ABC Company has set the following standards for one unit of product: Direct materials: 0.5 pounds @ 10.00 per hour. The company produced 35,000 units and had the following actual costs: Direct materials: 18,000 pounds at a total cost of 374,400. Compute the direct materials price variance.
Solution 1
The direct materials price variance can be calculated using the formula:
Price Variance = (Actual Quantity x Standard Price) - Actual Cost
First, we need to calculate the standard price for the actual quantity of direct materials used:
Standard Price = 0.5 pounds/unit x 0.50/unit
Actual Quantity = 18,000 pounds / 0.5 pounds/unit = 36,000 units
So, Actual Quantity x Standard Price = 36,000 units x 18,000
Then, we subtract the actual cost from this:
Price Variance = 17,280 = $720
So, the direct materials price variance is $720. This is a favorable variance, as the actual cost was less than the standard cost.
Solution 2
The direct materials price variance can be calculated using the formula:
Price Variance = (Actual Quantity x Standard Price) - Actual Cost
First, we need to calculate the standard price for the actual quantity of direct materials used:
Standard Price = 0.5 pounds/unit x 0.50/unit
Actual Quantity = 18,000 pounds / 0.5 pounds/unit = 36,000 units
So, Actual Quantity x Standard Price = 36,000 units x 18,000
Then, we subtract the actual cost from this:
Price Variance = 17,280 = $720
So, the direct materials price variance is $720. This is a favorable variance, as the actual cost was less than the standard cost.
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