Price variance
Price variance measures the difference between what you actually paid for materials versus a reference price, such as standard cost, budget, contracted price, or prior period actual. Tracking price variance helps evaluate procurement performance, explain cost changes, and identify areas needing attention.
Examples
Standard cost variance: A company sets standard costs at the beginning of each year. Monthly price variance reports compare actual purchase prices to standards. A component with $1.00 standard cost purchased at $0.92 shows favorable variance of $0.08 per unit, or $8,000 on 100,000 units.
Contract compliance variance: A contracted price is $5.00 per unit, but some purchases occurred at $5.25 due to expedited orders outside contract terms. The unfavorable variance of $0.25 per unit indicates contract leakage worth investigating.
Year-over-year variance: Comparing this quarter's prices to the same quarter last year reveals trends. A category showing 12% unfavorable variance warrants analysis of whether market conditions, supplier performance, or specification changes drove the increase.
Definition
Price variance analysis requires defining the reference price clearly. Different reference points answer different questions: variance from standard measures planning accuracy, variance from contract measures compliance, and variance from prior period measures trend.
Variance analysis should distinguish controllable from uncontrollable factors. Commodity market movements may cause unfavorable variance that procurement couldn't prevent. Mix changes or specification differences may explain variance not attributable to pricing changes.
Price variance reporting is most useful when it prompts investigation and action. Significant unfavorable variances should be analyzed to understand root causes. Favorable variances may indicate opportunities to extend successful approaches to other categories.
Variance tracking integrates with financial reporting and cost accounting. Understanding how price variances affect product costs and margins connects procurement performance to business results.
Frequently asked questions
What is price variance in procurement?
Price variance measures the difference between what you actually paid for materials and a reference price such as standard cost, budget, contracted price, or a prior period actual. Tracking price variance helps evaluate procurement performance, explain cost changes, and identify areas needing attention.
What reference price should you measure variance against?
The reference point determines the question price variance answers: variance from standard cost measures planning accuracy, variance from contract measures compliance, and variance from a prior period measures trend. A component with a $1.00 standard bought at $0.92 shows $8,000 of favorable variance on 100,000 units, while purchases at $5.25 against a $5.00 contract flag leakage worth investigating.
Is unfavorable price variance always procurement's fault?
Unfavorable price variance is not automatically a performance failure. Commodity market movements can cause variance procurement could not prevent, and mix changes or specification differences may explain variance that has nothing to do with pricing. Good analysis distinguishes controllable from uncontrollable factors before assigning credit or blame.
How should price variance reporting be used?
Price variance reporting is most useful when it prompts investigation and action. Significant unfavorable variances deserve root cause analysis, such as a category showing 12% unfavorable year-over-year, and favorable variances may reveal approaches worth extending to other categories. Variance also integrates with financial reporting and cost accounting, connecting procurement performance to product costs and margins.
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