ACC 510.docx

ACC 510.docx - 33 |P a g e Variance analysis is also used...

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33 | P a g e Variance analysis is also used to explain the difference between the actual salesdollars and the budgeted sales dollars. Examples include sales price variance, salesquantity (or volume) variance, and sales mix variance. A difference in the relative proportion of sales can account for some of the difference in a company‘s profits. Material Cost Variance Definition: The materials price variance is the difference between the actual andbudgeted cost to acquire materials, multiplied by the total number of units purchased.The formula is:(Actual price - Standard price) x Actual quantity used = Material price varianceThe key part of this calculation is the standard price, which is decided upon by theengineering and purchasing departments, based on estimates of usage,probable scrap levels, required quality, likely purchasing quantities, and several other factors. Politics can enter into the standard-setting decision, which means that standards may be set so high that it is quite easy to acquire materials at prices lessthan the standard, resulting in a favorable variance. Thus, the decision- makingprocess that goes into the creation of a standard price plays a large role in theamount of materials price variance that a company reports.If the standard price is reasonable, then a materials price variance may be caused bysuch valid
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