Business Definition for: price variance
price variance
difference between actual unit price and standard unit price, multiplied by actual quantity of input used. It reflects a change between the expected price and actual price of input.
Price Variance = (Actual Price - Standard Price) x Actual Quantity where a positive result indicates an increase in costs (i.e., an unfavorable variance), while a negative result means a reduction in costs (i.e., a favorable variance).
See also
labor rate (price) variance
,
sales price variance
,
materials price variance
Related Terms:
any deviation from standard in the average hourly rate paid to workers:
Labor Rate = (Actual Rate - Standard Rate) ¥ Actual Hours of Labor Used Variance
For example, assume that the standard cost of direct labor per unit of product A is 2.5 hours ¥ $14 = $35. Assume further that during the month of March the company recorded 4500 hours of direct labor time. The actual cost of this labor time was $64,800, or an average of $14.40 per hour. The company produced 2000 units of product A during the month. The labor rate variance is ($14.40 - $14.00) ¥ 4500 hours = $1800, which is unfavorable since the actual hourly rate exceeded the standard rate. This may be the result of unavoidable increases in labor rates, or it may reflect excessive labor costs due to use of higher skilled labor commanding higher wages.
difference between actual selling price per unit and the budgeted selling price per unit, multiplied by the actual number of units sold.
| Sales Price Variance = |
(Actual Price-Budgeted Price) |
×Actual Sales |
If the actual price is greater than the budgeted price, a variance is favorable; otherwise, it is unfavorable.
difference between what is paid for a given quantity of materials and what should have been paid, multiplied by the actual quantity of materials used: Materials price variance = (actual price - standard price) x actual quantity. In reality, since material price variances are isolated at the time of purchase, it is customary to multiply the difference between the actual price and the standard price by the actual quantity purchasedrather than used. It is more often called materials purchase price variance.
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