Material Price Variance

What is this formula?

Material Price Variance (MPV) measures the difference between the actual cost paid for materials and the cost that should have been incurred according to the standard cost system.

A positive variance generally indicates that materials were purchased at a higher price than expected, while a negative variance indicates favorable purchasing performance.

When to use it

Use this formula in standard costing systems to evaluate purchasing efficiency, supplier performance, procurement decisions, and cost control programs.

Example

A manufacturer purchases 2,000 kg of raw material.

Data:

Actual Price = $5.50/kg

Standard Price = $5.00/kg

Actual Quantity = 2,000 kg

Formula:

MPV=(AP-SP)AQ

Substitution:

MPV=(5.50-5.00)×2,000

MPV=1,000

Result:

Material Price Variance = $1,000 unfavorable

Applications

Cost accounting

Budget control

Procurement analysis

Supplier evaluation

Manufacturing cost management

Note

Material Price Variance is a managerial accounting metric rather than a physical law. Different organizations may classify favorable and unfavorable variances using different sign conventions. Some accounting systems analyze purchased quantities, while others analyze quantities issued to production.