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Price variance

Price variance

If the actual price incurred is lower than the standard price, this is considered a favorable price variance. If the actual price incurred is higher than the standard price, this is considered an unfavorable price variance.

However, achieving a favorable price variance might only be achieved by purchasing goods in large quantities, which may put the business at risk of never using some of its inventory. Conversely, the purchasing department may be committed to having very little inventory on hand, and so buys materials in very small quantities, which tends to result in unfavorable price variances. Thus, the operational plan of a business tends to drive the types of price variances that it incurs.

Reference: accountingtools.com