The purchasing department is often responsible for the price paid for materials that may create a direct materials price variance

The purchasing department is often responsible for the price paid for materials that may create a direct materials price variance. Insights from the variance inform decisions about supplier selection, contract renegotiations, or changes to purchasing strategies like order timing or quantity. Understanding variance trends also helps refine future budgets and set more accurate standard costs, improving financial planning.

Standard Price

• The direct materials price variance is a diagnostic tool within cost analysis.
• Purchasing materials in larger quantities often enables companies to obtain lower per-unit prices through volume discounts.
• Generally speaking, the purchase manager has control over the price paid for goods and is therefore responsible for any price variation.
• Answer (B) is correct.Shipping employees send out finished products to customers.
• 19Which of the following is least likely to cause an unfavorable materials quantity (usage) variance?

9A company planned to produce 3,000 units of its single product, Titactium, during November. Thestandard specifications for one unit of Titactium include 6 pounds of materials at $.30 per pound. Actual productionin November was 3,100 units of Titactium.

What is a favorable DM price variance?

The standard price is the anticipated which department is often responsible for the price paid for direct materials cost per unit of direct material, established during budgeting. It is based on historical data, market forecasts, supplier agreements, and material specifications. This benchmark serves as the target against which actual purchasing performance is measured.

Analyzing a Favorable DM Price Variance

The direct labor efficiency variance but not the direct labor rate variance. This variance is the responsibility of the purchasing department. 26A company recently purchased 108,000 units of raw material for $583,200. Three units of rawmaterials are budgeted for use in each finished good manufactured, with the raw material standard set at $16.50 foreach completed product. The company manufactured 32,700 finished units during the period just ended and used99,200 units of raw material. Answer (A) is correct.A direct materials price variance is the actual quantity used times the difference between the standardand actual prices.

The Purchasing Department Is Often Responsible for the Price Paid

10A purchasing manager was able to acquire a large quantity of direct materials from a new supplierat a discounted price. The inventory supervisor is concerned because the warehouse has become crowded and somethings had to be rearranged. The vice president of production is concerned about the quality of the discountedmaterials. However, the Engineering Department tested the new materials and indicated that they are of acceptablequality. At the end of the month, the corporation experienced a favorable direct materials usage variance, a favorabledirect labor usage variance, and a favorable direct materials price variance. The usage variances were solely theresult of a higher yield from the new material.

Adjusting Accounting Records

• Conversely, failing to meet discount thresholds could lead to paying a higher unit price than planned, contributing to an unfavorable variance.
• At the end of the month, the corporation experienced a favorable direct materials usage variance, a favorabledirect labor usage variance, and a favorable direct materials price variance.
• Thus, eitherthe production manager or the purchasing manager could be responsible for a material usage variance.

It is normally considered the responsibility of the purchasing manager because noone else has an opportunity to influence the price. In this case, the purchasing manager obtained thediscount that led to the favorable price variance. Businesses manufacturing products depend heavily on raw materials, making material costs a significant factor in profitability. Answer (A) is correct.The materials price variance is calculated by multiplying the difference between actual price andstandard price by the actual units purchased. The materials usage variance is calculated by multiplyingthe difference between the actual usage and the standard usage by the standard price.

Inferior materials were purchased.B. Actual production was lower than planned production.C. Workers used were less skilled than expected.D. Replacement production equipment had just been installed. 11Price variances and efficiency variances can be key to the performance measurement within acompany.

The materials usage (or materials quantity) variance, when unfavorable, is oftenattributable to waste, shrinkage, or theft in the production areas. The excess usage occurs under thesupervision of the production department. Determining the price or cost to be used as the standard cost is often difficult, because the price used are controlled more by external factors than by a company’s management. Prices selected should reflect current market prices and are generally used throughout the forthcoming fiscal period. The standard price for direct materials should reflect the final, delivered cost of the materials, net of any discounts taken. Answer (D) is correct.The materials price variance is the difference between the standard price and the actual price paid formaterials.

The action management should take regarding this situation should be toA. Negatively evaluate the performance of the purchasing manager.B. Negatively evaluate the performance of the production manager.C. Change the raw material price standard.D. Ask the production manager to lower the material usage standard to compensate for higher material costs.

Thus, it may be the responsibility of the production department becauseexcess usage would occur while the materials are in that department. In addition, industrial engineeringmay play a role because it is responsible for design of the production process. Analyzing the variance helps evaluate the purchasing department’s effectiveness. Consistent unfavorable variances might point to issues like weak negotiation, over-reliance on expensive suppliers, or missed discount opportunities. Persistent favorable variances could indicate strong negotiation or perhaps an overly conservative standard price.

The Production Supervisor should not havegiven in to pressure from the Marketing Department to bypass the normal inspection process; thissimply led to more delays and lower quality. Also, a higher standard price may simply mean that the general prices in the industry have fallen and that the standard needs to be revised. Answer (B) is correct.Shipping employees send out finished products to customers. They are not involved in the productionprocess.

The analysis directs management attention toward significant deviations, enabling focused efforts to address issues or leverage opportunities. Generally speaking, the purchase manager has control over the price paid for goods and is therefore responsible for any price variation. Many factors influence the price paid for the goods, including number of units ordered in a lot, how the order is delivered, and the quality of materials purchased. 17Under a standard cost system, the materials price variances are usually the responsibility of theA.