Understanding Price and Volume Variance: Why It Matters

When comparing actual performance to budget, two variances often tell the story: Price Variance and Volume Variance.

• Price Variance shows the impact of paying more or less per unit than expected.

• Volume Variance reflects the effect of buying or producing more or fewer units than planned.

Example:

• Budgeted total cost = $12,000

• Actual total cost = $13,200

At first glance, this looks like a $1,200 unfavourable variance. But let’s break it down:

• Budgeted price = $12 per unit

• Actual price = $11 per unit

• Budgeted volume = 1,000 units

• Actual volume = 1,200 units

Price Variance = ($11 – $12) × 1,200 = $1,200 favourable (lower unit cost)

Volume Variance = (1,200 – 1,000) × $12 = $2,400 unfavourable (higher quantity purchased)

So, the higher total cost is actually due to increased activity, not inefficiency.

Understanding these insights help leaders make better decisions.