What is price variance in cost accounting? - Investopedia

Price variance is the actual unit cost of an item less its standard cost, multiplied by the quantity of actual units purchased. The standard cost of an item ... CorporateFinance&Accounting Accounting WhatIsPriceVarianceinCostAccounting? Pricevarianceistheactualunitcostofanitemlessitsstandardcost,multipliedbythequantityofactualunitspurchased.Thestandardcostofanitemisitsexpectedorbudgetedcostbasedonengineeringorproductiondata.Thevarianceshowsthatsomecostsneedtobeaddressedbymanagementbecausetheyareexceedingornotmeetingtheexpectedcosts. KeyTakeaways: Pricevarianceistheactualunitcostofapurchaseditem,minusitsstandardcost,multipliedbythequantityofactualunitspurchased.Pricevarianceisacrucialfactorinbudgetpreparation.Apricevarianceshowsthatsomecostsneedtobeaddressedbymanagementbecausetheyareexceedingornotmeetingtheexpectedcosts. HowPriceVarianceWorksinCostAccounting Pricevariance isimportantforbudgetingandplanningpurposes,particularlywhencompaniesaredecidingwhatquantitiesofitemstoorder.Theformulaforpricevarianceis:  Price Variance = ( P − Standard Price ) × Q where: P = Actual Price Q = Actual Quantity \begin{aligned}&\text{PriceVariance}=(\text{P}-\text{StandardPrice})\times\text{Q}\\&\textbf{where:}\\&\text{P}=\text{ActualPrice}\\&\text{Q}=\text{ActualQuantity}\\\end{aligned} ​Price Variance=(P−Standard Price)×Qwhere:P=Actual PriceQ=Actual Quantity​ Basedontheequationabove,apositivepricevariance meanstheactualcostshaveincreasedoverthestandardprice,andanegativepricevariancemeanstheactualcostshavedecreasedoverthestandardprice. Incostaccounting,pricevariancecomesintoplaywhenacompanyisplanningitsannualbudgetforthefollowingyear.Thestandardpriceisthepriceacompany'smanagementteamthinksitshouldpayforanitem,whichisnormallyaninputforitsownproductorservice.Sincethestandardpriceofanitemisdeterminedmonthspriortoactuallypurchasingtheitem,pricevarianceoccursiftheactualpriceatthetimeofpurchaseishigherorlowerthanthestandardpricedeterminedintheplanningstageofthecompany'sannualbudget. Themostcommonexampleofpricevarianceoccurswhenthereisachangeinthenumberofunitsrequiredtobepurchased.Forexample,atthebeginningoftheyear,whenacompanyisplanningforQ4,itforecasts itneeds10,000unitsofanitematapriceof$5.50.Sinceitispurchasing10,000units,itreceivesadiscountof10%,bringingtheperunitcostdownto$5.WhenthecompanygetstoQ4,however,ifitonlyneeds8,000unitsofthatitem,thecompanywillnotreceivethe10%discountitinitiallyplanned,whichbringstheperunitcostto$5.50andthepricevarianceto50centsperunit. AchievingaFavorablePriceVariance Acompanymightachieveafavorablepricevariancebybuyinggoodsinbulkorlargequantities,butthisstrategybringstheriskofexcessinventory.Buyingsmallerquantitiesisalsoriskybecausethecompanymayrunoutofsupplies,whichcanleadtoanunfavorablepricevariance.Businessesmustplancarefullyusingdatatoeffectivelyitspricevariances. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedArticles Accounting Howbudgetingworksforcompanies Economics MaximizingProfitsinaMonopolisticMarket FinancialAnalysis MarginalRevenueandMarginalCostofProduction FinancialRatios HowtoCalculatetheRequiredRateofReturn(RRR) FinancialAnalysis Budgetingvs.FinancialForecasting:What'stheDifference? FinancialRatios What'sConsideredaGoodPEGRatio? PartnerLinks RelatedTerms WhatIsCostAccounting? Costaccountingisaformofmanagerialaccountingthataimstocaptureacompany'stotalcostofproductionbyassessingitsvariableandfixedcosts. more SalesPriceVarianceDefinition Salespricevarianceisthedifferencebetweenthepriceabusinessexpectstosellitsproductsorservicesforandwhatitactuallysellsthemfor. more UnfavorableVariance Unfavorablevarianceisanaccountingtermthatdescribesinstanceswhereactualcostsaregreaterthanthestandardorexpectedcosts. more EconomicOrderQuantity(EOQ) Economicorderquantity(EOQ)istheorderquantityacompanyshouldmakeforitsinventorygivenproductioncost,demandrate,andothervariables. more UnderstandingCostofGoodsSold(COGS) Costofgoodssold(COGS)isdefinedasthedirectcostsattributabletotheproductionofthegoodssoldinacompany. more InternalRateofReturn(IRR) Theinternalrateofreturn(IRR)isametricusedincapitalbudgetingtoestimatethereturnofpotentialinvestments. more