A favorable price variance means the actual price paid for purchased materials is lower than the budgeted cost. This occurs when suppliers reduce the price of materials, a business negotiates better deals, or when price changes in the market work to the buyer’s advantage. On the surface, this improves cash flow and increases profitability per product or service. However, favorable variance isn’t always positive: a lower price can also signal lower quality, longer lead times, or reduced speed of delivery, which may hurt customer satisfaction.
An unfavorable price variance happens when the price and the actual price of purchased goods exceed the expected standard. This can occur if the business expects to sell a certain number of units but demand surges, forcing purchases at higher costs. It may also stem from volatility in the price of materials or inefficiencies in sourcing. This form of variance means profitability declines, margins shrink, and cash flow worsens.
In both cases, price variance allows businesses to see visibility into procurement efficiency and align with forecast expectations. Companies should track sales price variance, monitor units sold, and measure against KPI benchmarks. Effective analysis ensures that favorable variances don’t compromise quality and that unfavorable price variance leads to corrective business strategies such as differentiation, supplier renegotiation, or volume consolidation.