Question

How are price and quantity variances computed? Why are separate price and quantity variances useful to an organization?

Answer 1

(1)

(A)
Material price variance = actual quantity purchased x (standard price - actual price)
Where,
Actual price = material cost paid/units of material purchased

(B)
Material quantity variance = standard price x (standard quantity - actual quantity used)
Where,
Standard quantity = actual output x standard quantity per unit of output

(2)

price variance is useful because it gives information regarding the difference between the cost of direct material purchased and the standard cost. This difference may have been caused due to different quality of material purchased, change in market prices etc

Quantity variance is useful because it gives information regarding the difference between the actual quanity and the standard quantity. This difference may have been caused due to change in efficiency of labor, damage while being moved or stored within the company, damage during the production process.