Final answer:
The direct materials price variance indicates the discrepancy between the actual cost of materials and their standard cost, which helps in cost control and performance analysis.
Step-by-step explanation:
Price variance is a term used in cost accounting which denotes the difference between the expected cost of an item (standard cost) and the actual cost at the time of purchase. The price of an item is often affected by the quantity of items ordered, and this is taken into consideration. A price variance means that actual costs may exceed the budgeted cost, which is generally not desirable. This is important when companies are deciding what quantities of an item to purchase.
The direct materials price variance reflects the difference between the actual cost of a material and what the cost should have been according to the standard cost. When the actual cost is higher than the standard cost, the variance is unfavorable, indicating that the materials cost more than expected. Conversely, when the actual cost is lower, the variance is favorable. This variance is an essential tool in cost accounting as it helps businesses control costs and analyze performance.