Cogs definition accounting3/20/2024 ![]() ![]() The purchase price variance is also known as the material price variance. This creates a purchase price variance of $0.50 per widget, and a variance of $4,000 for all of the 8,000 widgets that Hodgson purchased. During the subsequent year, Hodgson only buys 8,000 units, and so cannot take advantage of purchasing discounts, and ends up paying $5.50 per widget. Example of a Purchase Price Varianceĭuring the development of its annual budget, the engineers and purchasing staff of Hodgson Industrial Design decide that the standard cost of a green widget should be set a $5.00, which is based on a purchasing volume of 10,000 for the upcoming year. The purchase price variance may not be necessary in a "pull" manufacturing environment, where raw materials are only purchased from suppliers in small increments and delivered to the company as needed in this situation, management tends to be more focused on keeping the investment in inventory as low as possible, and on the speed with which customer orders can be filled. When the Purchase Price Variance Does not Apply Distribution costs are only records in the income statement and they are no records in the balance. Note that there is no difference in accounting treatment for distribution costs and other expenses. The standard cost of an item was derived based on a different purchasing volume than the amount at which the company now buys. The total distribution costs are deducted from the company’s gross profit to calculate the net profit or loss of the company for the period. These fees can substantially increase the price of a product. The company incurred excessive shipping charges to obtain materials on short notice from suppliers. The company has changed suppliers for any number of reasons, resulting in a new cost structure that is not yet reflected in the standard. There is an industry shortage of a commodity item, which is driving up the cost. ![]() The actual cost may have been taken from an inventory layering system, such as a first-in first-out system, where the actual cost varies from the current market price by a substantial margin. ![]() There are a number of possible causes of a purchase price variance, which are noted below. ![]()
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