[Anonymous]

In CPAexcel, it states that the selling price variance is “(budgeted price-actual price)*actual demand”. It states that the direct material quantity variance is “(budgeted quantity-actual quantity)*budgeted price”. I understand the budgeted minus actual part, but why does one variance multiply using “actual”, and the other variance multiply using “budgeted”?

[jfreelov]

My answer is mathematical and doesn't necessarily shine a whole lot of light on the reasoning.

The basic idea is that when a company budgets their revenue, they are predicting a separate value for quantity and a separate value for price and then multiplying those figures to come up with predicted revenue.

BQ x BP = BRev

Then reality comes along and the company ends up with

AQ x AP = ARev

The total variance between what they budgeted for revenue and what actually occurred is

Total Variance = BRev – ARev = BQBP – AQAP

That tells the company the total amount of revenue they misjudged by, but it doesn't say much about whether it was the price or quantity estimates they were off by. So, with a little manipulation of the formula above, we can break out the two components of selling price variance and direct material quantity variance.

Total Variance = BQBP – AQAP

[Add and subtract the same term BPAQ]

= BQBP – AQAP + (BPAQ – BPAQ)

[Rearrange the terms]

= BPAQ – AQAP + BQBP – BPAQ

[Factor out AQ and BP]

= (BP – AP)AQ + (BQ – AQ)BP

= Selling price variance + Direct material quantity variance

And presto. The final answer to your question is that the answer is mathematical. It must be this way otherwise the sum of the two variances would not add up to the actual total variance.

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[jfreelov]

My answer is mathematical and doesn't necessarily shine a whole lot of light on the reasoning.

The basic idea is that when a company budgets their revenue, they are predicting a separate value for quantity and a separate value for price and then multiplying those figures to come up with predicted revenue.

BQ x BP = BRev

Then reality comes along and the company ends up with

AQ x AP = ARev

The total variance between what they budgeted for revenue and what actually occurred is

Total Variance = BRev – ARev = BQBP – AQAP

That tells the company the total amount of revenue they misjudged by, but it doesn't say much about whether it was the price or quantity estimates they were off by. So, with a little manipulation of the formula above, we can break out the two components of selling price variance and direct material quantity variance.

Total Variance = BQBP – AQAP

[Add and subtract the same term BPAQ]

= BQBP – AQAP + (BPAQ – BPAQ)

[Rearrange the terms]

= BPAQ – AQAP + BQBP – BPAQ

[Factor out AQ and BP]

= (BP – AP)AQ + (BQ – AQ)BP

= Selling price variance + Direct material quantity variance

And presto. The final answer to your question is that the answer is mathematical. It must be this way otherwise the sum of the two variances would not add up to the actual total variance.

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[Author]

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