Question

What can be done to help reduce or eliminate price variances?

Answer 1

Price variance in material purchases is due to differences in Standard price and actual purchase price. To reduce or eliminate price variance, the actual price paid for material purchases should be the same or somewhat equal to standard price allowed for such purchases. A favorable price variance shows actual price purchases is less than standard price allowed which mainly occurs due to purchases of material in bulk to get purchase discount or purchase of cheap quality material at a lower price and unfavorable price variance shows actual price paid more than standard price allowed which can be due to higher or good quality material purchased at higher price.