Final answer:
The direct materials price variance is calculated by comparing the actual cost to the standard cost of materials purchased. With an actual price of $3.40 per pound versus a standard price of $3.50, and an actual purchase of 6,700 pounds, the variance is $670 favorable.
Step-by-step explanation:
The student is asking how to calculate the direct materials price variance, which measures the difference between the actual cost and the standard cost of materials. To determine the variance, we begin by calculating the standard cost of the materials that actually should have been used for the actual output. The standard price per pound is given as $3.50, and the standard quantity allowed for the actual output is 7,000 pounds. However, the actual quantity purchased and used was 6,700 pounds, with an actual price of $3.40 per pound. Therefore, the variance is calculated as follows:
(Actual Quantity × Actual Price) - (Actual Quantity × Standard Price) = (6,700 pounds × $3.40/pound) - (6,700 pounds × $3.50/pound) = $22,780 - $23,450 = -$670.
Since the result is negative, the variance is considered favorable because the actual price paid per pound is less than the standard price expected to be paid. A favorable variance indicates a cost saving for the company.