Price variance - AccountingTools

Price variance is the actual unit cost of a purchased item, minus its standard cost, multiplied by the quantity of actual units purchased. AccountingTools CPECourses CPECourses CPELogIn HowtoTakeaCourse StateCPERequirements Books CollegeTextbooks AccountingBooks FinanceBooks OperationsBooks CPAExamStudyGuides Articles Articles TopicsIndex SiteArchive Podcast AccountingBestPractices PodcastIndex PodcastSummary Dictionary FAQs About About Contact EnvironmentalCommitment Home AccountingTools CPECourses/CPECoursesCPELogInHowtoTakeaCourseStateCPERequirements Books/CollegeTextbooksAccountingBooksFinanceBooksOperationsBooksCPAExamStudyGuides Articles/ArticlesTopicsIndexSiteArchive Podcast/AccountingBestPracticesPodcastIndexPodcastSummary Dictionary/ FAQs/ About/AboutContactEnvironmentalCommitment Home/ AccountingTools AccountingCPECourses&Books Articles AccountingTools CPECourses/CPECoursesCPELogInHowtoTakeaCourseStateCPERequirements Books/CollegeTextbooksAccountingBooksFinanceBooksOperationsBooksCPAExamStudyGuides Articles/ArticlesTopicsIndexSiteArchive Podcast/AccountingBestPracticesPodcastIndexPodcastSummary Dictionary/ FAQs/ About/AboutContactEnvironmentalCommitment Home/ RelatedCoursesCostAccountingFundamentals WhatisaPriceVariance?Pricevarianceistheactualunitcostofapurchaseditem,minusitsstandardcost,multipliedbythequantityofactualunitspurchased.Thepricevarianceformulais:(Actualcostincurred-standardcost)xActualquantityofunitspurchased=PricevarianceIftheactualcostincurredislowerthanthestandardcost,thisisconsideredafavorablepricevariance.Iftheactualcostincurredishigherthanthestandardcost,thisisconsideredanunfavorablepricevariance.However,achievingafavorablepricevariancemightonlybeachievedbypurchasinggoodsinlargequantities,whichmayputthebusinessatriskofneverusingsomeofitsinventory.Conversely,thepurchasingdepartmentmaybecommittedtohavingverylittleinventoryonhand,andsobuysmaterialsinverysmallquantities,whichtendstoresultinunfavorablepricevariances.Thus,theoperationalplanofabusinesstendstodrivethetypesofpricevariancesthatitincurs.ProblemswithPriceVarianceThekeyproblemwiththepricevarianceisthatitisbasedonastandardcost,whichisessentiallytheopinionofsomeonewithintheorganization.Ifthestandardcostissetatanunrealisticlevel,thentherewillalwaysbeamisleadingpricevarianceassociatedwithit.Anotherconcernwithpricevarianceisthatittendstodrivepurchasingmanagerstopurchaseinbulkinordertoimprovethevariance,whichcanresultinexcessiveinvestmentsininventory.TypesofPriceVariancesThepricevarianceconceptcanbeappliedtoanytypeofcost.Forexample,thereisthelaborratevarianceforlaborcosts,thepurchasepricevarianceformaterials,thevariableoverheadspendingvarianceforvariableoverhead,andthefixedoverheadspendingvarianceforfixedoverhead. Purchasesaccountdefinition Provisiondefinition CPECourses/CPECoursesCPELogInHowtoTakeaCourseStateCPERequirements Books/CollegeTextbooksAccountingBooksFinanceBooksOperationsBooksCPAExamStudyGuides Articles/ArticlesTopicsIndexSiteArchive Podcast/AccountingBestPracticesPodcastIndexPodcastSummary Dictionary/ FAQs/ About/AboutContactEnvironmentalCommitment Home/ AccountingTools CollegeTextbooksAccountingBooksFinanceBooksOperationsBooksCPAExamStudyGuides Sendusyoure-mailaddresstoreceivemonthlycoursediscounts * Thankyou! Copyright2022