Finance:Price variance

The price variance (Vmp) of a material is computed as follows:

Vmp = (Actual unit cost - Standard unit cost) * Actual Quantity Purchased

or

Vmp = (Actual Quantity Purchased * Actual Unit Cost) - (Actual Quantity Purchased * Standard Unit Cost).

When the Actual Materials Price is higher than the Standard Materials Price, the variance is said to be unfavorable, since the Actual price paid on materials purchased is greater than the allowed standard. The variance is said to be favorable when the Standard materials Price is higher than the Actual Materials Price, since less money was spent in purchasing the materials than the allowed standard.