Price Variance

Table of contents

What is price variance?

Price variance, also known as sales price variance, is a pricing strategy representing the difference between the standard price or selling price and the actual price. In other words, it is the difference between the price at which a business expects to sell a product and the price at which a company sells a product. The important aspect of the concept is that it can be either favorable or unfavorable.

At this point, favorable price variance occurs when a company puts an actual price higher than a standard price. A business manages to sell the product at a higher price than expected. In turn, unfavorable price variance occurs when an actual price is lower than a selling price. In such a case, a company failed to sell a product for an anticipated price.

How to calculate price variance?

When calculating the phenomenon, one should consider several crucial elements. Price variance allows a business to determine which product or service offers the most revenue and profits. It is important to use details like unit cost, actual price, and standard price to calculate the notion.

In terms of formula, calculating price variance is the following: one should subtract the actual price from the selling price and multiply the result by the total number of units purchased. One should mention the factors of unit cost and units purchased to allow a business to determine the extent of all units sold and revenues received. It shows whether a company got favorable or unfavorable price variance.

Based on the formula above, one can tell whether a company’s actual costs have risen and a business needs to pay more to buy materials and other elements. The formula can also illustrate that the actual cost has decreased, and a company can spend less.

Is purchase price variance an expense?

The concept cannot be considered an expense. It offers tremendous insight into the pricing strategies a company pursues. Understanding the difference between a positive and negative price variance illustrates whether a business made the right prediction on the selling price. In addition, it demonstrates whether a company miscalculated and underestimated the market or consumers' purchasing behaviors.

Along with the key insights, the information offered by the approach provides a broader perspective on how well a business operates. For instance, the standard price is the factor that includes the product’s quality, quantity, and speed of delivery. It is a collective opinion of various employees and departments that creates a particular vision of what the product’s price should be based on available information concerning the product. If such a vision does not match reality, the actual price will be lower. Essentially, it means a company overestimated the value of a product and underestimated factors like consumers' demand and purchasing power.

In such a context, price variance is not an expense. Understanding the concept grants tremendous insights that can be further used to alternate the existing pricing strategies and get a better perspective on business operations and how consumers perceive them.

The formula for the materials price variance is?

The formula for the materials price variance (MPV) is the following:

Here, MPV is the element one calculating. SP is a standard price per unit of the direct material. AP is the actual price per unit of the material. AQ is the exact quantity of the material the company purchased.

Based on the formula above, a company can find the price differentiation regarding the price of materials purchased and the further price for a product. Understanding the role of materials in product production is vital for determining the proper price strategy.

How to calculate purchase price variance?

Calculating the purchase price variance depends on the same elements as other concept variants. One should consider the selling price, the actual price, the units purchased, and the unit cost. In such a case, the phenomenon offers a distinct perspective on how companies anticipate purchasing power and how it happens in a real setting.

To illustrate, imagine there is a company trying to estimate the profits for the next year. It has a number of units produced along with the selling price. After the first quarter, a business realizes the consumers are not willing to pay the anticipated price. There can be several reasons for such a change in purchasing behaviors. At this point, considering the purchasing price variance, a company lowers the price for a product to save as much revenue as possible. This is an example of how calculating purchase price variance allows a business to adjust its business operations and pricing strategies.

How to calculate material price variance?

To calculate a material price variance (MPV), the first step is to use the formula mentioned in a couple of paragraphs above. MPV occurs when an actual price paid for materials used in production differs from the given selling price for the same materials. The important thing is that the concept applies to one type of cost and other kinds of expenses.

Calculating MPV shows how effectively the purchasing department operates. A favorable MPV offers that a purchasing department managed to buy the direct materials at economical rates compared to the estimated value. Yet, one should remember that favorable MPV might not always be positive. For instance, a purchasing department might have ordered lower quality material to get a lower cost.

What is PPV in accounting?

In accounting, purchase price variance (PPV) is used when a business plans its annual budget. The company takes input from a company’s management team and an anticipated price. Notably, the standard price of an item is determined before the items are purchased. At this point, PPV plays a major role in the planning stage of budgeting in accounting.

Concluding remarks

Price variance shows a difference between the anticipated price and the actual product’s sale price. The phenomenon can be either favorable or unfavorable. It is calculated with different formulas and shows whether a purchasing department properly planned the standard price and evaluated the product itself. Essentially, the concept grants a vision of how pricing should work based on knowledge of quality, quantity, and materials.

Tags:

• Price Variance

• formula

• materials price variance

• MPV

• purchase price variance

• PPV

Marina Dias,

Pricing Solution Consultant at Competera