What is price variance?

Price variance or sales price variance represents a difference between the standard price or selling price at which a company expects to sell a particular product or service and the actual price a firm sells a product or service. The crucial thing about sales price variance is about its conditions of favorable and unfavorable.

Essentially, if a product is sold higher than a previously targeted price, it is deemed favorable sales variance. If a product's actual price is lower than expected, one suggests an unfavorable price in sales price variance.

There is an important difference between favorable and unfavorable price variance. A range of elements must be considered to determine whether the notion comes in one direction or another. Essentially, suppose the market faces a decrease in the number of competitors. In that case, there is improved product differentiation and market segmentation, and the company uses an aggressive sales strategy, a favorable sales price variance emerges.

What is price variance?

How to calculate sales price variance?

Calculating selling price variance depends on several key factors. Naturally, sales price variance can tell a company which products contribute most to the revenues. It shows whether there is a need to reduce the price to boost sales price variance.

It is crucial to use several determinants to calculate the sales price variance. There is the actual price, standard price, and unit cost. Essentially, determining sales price variance depends on subtracting a standard price from an actual price and multiplying the outcome on unit cost and the number of units sold. With such a formula, one can establish sales price variance and determine the correct selling price.

If the calculation leads to a favorable sales price variance, the higher selling price realized is greater than the one anticipated in the standard. In turn, an unfavorable price variance shows that the average selling price was lower than the one anticipated. Such a condition emerges when there is an increase in the market, a decrease in demand, and a reduction in price or unit cost.

How to calculate the actual price?

The actual price is presented with the number of actual products sold with a total price. While the sales price variance illustrates the difference in the degree of total revenue caused by charging a difference to the standard price, the actual price is calculated by adding sales price variance to the standard price and dividing by units sold number.

To know the actual price, it is necessary to know sales price variance, standard price, and the number of units sold. The actual price shows how the market and pricing strategy turned out. It helps to determine whether the price prediction was correct or incorrect.

How to calculate purchase price variance?

When it comes to calculating purchase price variance, it is important to keep in mind several aspects. You need the actual price, standard price, and actual quantity of units purchased to calculate the notion. The formula is the actual price minus standard price multiplied by an actual quantity of units sold.

The important aspect of purchase price variance depends on the baseline price. The concept shows that purchase price variance assumes that the product quality is the same and the quantity of the units purchased does not affect the purchase price.

Conclusion

Sales price variance directly depends on understanding the market and the ability to make a proper prediction. In such a case, if a firm makes an accurate prediction, the actual price will meet the expectations of the baseline price. As shown, calculating price variation depends on one’s ability to calculate actual price and purchase price variance.

To keep sales price variance in a favorable condition, it is crucial to evaluate the existing competition, have a good marketing strategy, and focus on product differentiation and market segmentation. If a company fails to recognize the aforementioned factors, the business can face decreased revenues.

FAQ

Is purchase price variance an expense?


Purchase price variance can be accounted as a debit or expense when the purchase order price is shared than the standard price.

What factors impact sales price variance?


General inflation, reduction in competition, sudden uplift in demand for the service or good, better sales price realization are the main reasons leading to sales price variance