If the standard cost is set at an unrealistic level, then there will always be a misleading price variance associated with it. ![]() The key problem with the price variance is that it is based on a standard cost, which is essentially the opinion of someone within the organization. Thus, the operational plan of a business tends to drive the types of price variances that it incurs. Conversely, the purchasing department may be committed to having very little inventory on hand, and so buys materials in very small quantities, which tends to result in unfavorable price variances. However, achieving a favorable price variance might only be achieved by purchasing goods in large quantities, which may put the business at risk of never using some of its inventory. If the actual cost incurred is higher than the standard cost, this is considered an unfavorable price variance. If the actual cost incurred is lower than the standard cost, this is considered a favorable price variance. ![]() (Actual cost incurred - standard cost) x Actual quantity of units purchased Price variance is the actual unit cost of a purchased item, minus its standard cost, multiplied by the quantity of actual units purchased.
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