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When actual prices and quantities are compared with expected prices and quantities, an additional
level of analysis can be conducted.
Exhibit 11.3 illustrates a more in-depth level of price and quantity variance analysis. During the
month, the firm realizes a positive variance of $6,000 relating to the cost of aluminum required for the
production of its products.
This $6,000 variance can then be further decomposed into a price variance and a quantity variance.
The price variance is $21,000 favorable due to the lower than expected purchase price for aluminum.
It is computed by multiplying the price variance per unit ($3 - $2.80) by the actual pounds utilized
(105,000). The quantity variance of $15,000 unfavorable is a result of lower efficiency in the
production process, which led to more material usage than had been expected. This variance is
computed by multiplying the quantity variance (105,000 - 100,000) by the expected price ($3). This
analysis reveals that the manufacturing process was less efficient than planned, in that it utilized more
material to produce its products. This inefficiency was more than offset, however, by lower prices for
direct materials than had been forecast. The price variance, therefore, masks the production
inefficiency, and this would not be revealed without the additional level of analysis.
Exhibit 11.3 Price and quantity variance analysis.
Comparing actual results with the budget, adjusting plans when necessary, and evaluating the
performance of managers are essential elements of budget control. Many people, however, find the
control phase difficult. When business results are less than expected, it may be painful to evaluate the
results. For some it is much easier to look ahead to future time periods when they hope things will be
better. But, frequently, plans for future success can be made realistically only when management
learns from its past mistakes. The control phase of budgeting provides much of that learning process.
Firms must be willing to evaluate performance carefully, adjusting plans and performance to stay on
track toward achieving goals and objectives.
Many companies have intricate budget performance reporting systems in place, but the firms
achieve little control from their use. In order to provide effective control, a business must use the
system as an integral part of the reward system of the company. That is, employees must understand
that budget performance reports are a component of their performance evaluation. There should be a
relationship between budget performance and rewards such as pay raises, bonuses, and promotions.
Generally it is easy to determine whether a company‟s budget performance reporting system is
working effectively. If discussions with managers yield comments such as “If we fail to achieve the