The actual price of a widget is $10 and the budgeted price is 7

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 is its expected or budgeted cost based on engineering or production data. The variance shows that some costs need to be addressed by management because they are exceeding or not meeting the expected costs.

Key Takeaways:

• Price variance is the actual unit cost of a purchased item, minus its standard cost, multiplied by the quantity of actual units purchased.
• Price variance is a crucial factor in budget preparation.
• A price variance shows that some costs need to be addressed by management because they are exceeding or not meeting the expected costs.

How Price Variance Works in Cost Accounting

Price variance is important for budgeting and planning purposes, particularly when companies are deciding what quantities of items to order. The formula for price variance is:

Price Variance=(P−Standard Price)×Qwhere:P=Actual PriceQ=Actual Quantity\begin{aligned} &\text{Price Variance} = ( \text{P} - \text{Standard Price} ) \times \text{Q} \\ &\textbf{where:} \\ &\text{P} = \text{Actual Price} \\ &\text{Q} = \text{Actual Quantity} \\ \end{aligned}​Price Variance=(P−Standard Price)×Qwhere:P=Actual PriceQ=Actual Quantity​

Based on the equation above, a positive price variance means the actual costs have increased over the standard price, and a negative price variance means the actual costs have decreased over the standard price.

In cost accounting, price variance comes into play when a company is planning its annual budget for the following year. The standard price is the price a company's management team thinks it should pay for an item, which is normally an input for its own product or service. Since the standard price of an item is determined months prior to actually purchasing the item, price variance occurs if the actual price at the time of purchase is higher or lower than the standard price determined in the planning stage of the company's annual budget.

The most common example of price variance occurs when there is a change in the number of units required to be purchased. For example, at the beginning of the year, when a company is planning for Q4, it forecasts it needs 10,000 units of an item at a price of $5.50. Since it is purchasing 10,000 units, it receives a discount of 10%, bringing the per unit cost down to $5. When the company gets to Q4, however, if it only needs 8,000 units of that item, the company will not receive the 10% discount it initially planned, which brings the per unit cost to $5.50 and the price variance to 50 cents per unit.

Achieving a Favorable Price Variance

A company might achieve a favorable price variance by buying goods in bulk or large quantities, but this strategy brings the risk of excess inventory. Buying smaller quantities is also risky because the company may run out of supplies, which can lead to an unfavorable price variance. Businesses must plan carefully using data to effectively its price variances.

These are simplifying, largely linearizing assumptions, which are often implicitly assumed in elementary discussions of costs and profits.

Q40. Which statement about a perpetual inventory system is true?

• FIFO cost of goods sold will be the same as in a periodic inventory system.
• Average costs are based entirely on unit cost simple averages.
• LIFO cost of goods sold will be the same as in a periodic inventory system.
• A new average is calculated under the average cost method after each sale.

I'm not 100% sure on this.

Reference

Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software.

Q41. Which type of business would be most likely to use a job order costing system?

• an electric car producer
• a wood milling company
• a beverage manufacturer
• a law firm specializing in injury law

Reference

Since lawyers and accountants work with different clients on unique accounts, many will use a job order costing system to track how much time and resources were used for each customer.

Q42. Assigning indirect costs to specific jobs is completed by _.

• allocating to manufacturing overhead account
• using the manufacturing cost incurred
• applying a predetermined overhead rate
• applying indirect costs to work in process

I'm not 100% sure on this.

Reference

Indirect cost rate calculations can be determined by dividing an indirect cost by a cost object, such as sales revenues or square footage.

What is the formula for price variance?

How to Calculate Purchase Price Variance:- Purchase Price Variance is the actual unit cost of a purchased item, minus its standard cost, multiplied by the quantity of actual units purchased. Purchase Price Variance (PPV) = (Actual Price – Standard Price) x Actual Quantity.

When the actual price is higher or lower than the standard price then it is?

If the actual cost is less than the standard cost or the actual profit is higher than the standard profit, it is called favorable variance. On the contrary, if the actual cost is higher than the standard cost or profit is low, then it is called adverse variance.

How to calculate material price variance calculator?

Here's a process you can use to calculate material price variance:.

Determine the quantity of product used. ... .

Find budgeted price and actual price. ... .

Subtract actual price from budgeted price of materials per unit. ... .

Multiply the result by the quantity of the product used. ... .

Determine whether it's favorable or unfavorable..