Price variance versus quantity variance, or rate variance versus efficiency variance. Important elements of variance analysis, when reviewing costs. Some people struggle with price variance versus quantity variance a lot. If you approach it in a structured way, through both formulas and graphs, it is actually fairly easy to understand! Let me show you.

⏱️TIMESTAMPS⏱️
00:00 Introduction to price variance versus efficiency variance
00:24 Variance analysis standard cost versus actual cost
00:54 Direct materials variance analysis
01:10 Labor cost variance analysis
01:35 Variance analysis example
02:58 Price variance definition
03:33 Quantity variance (efficiency variance) definition
04:04 Price variance versus quantity variance calculation
04:30 Price variance vs efficiency variance graph
05:07 Standard costs and variance analysis examples

Let’s say you are investigating the difference in spending between the budgeted standard cost of $1000 and the actual cost of $900. That’s nice, a saving of $100. To figure out where the saving comes from, you have to go a level below “total spending”, by comparing the standard quantity (SQ) and standard price (SP) that drove the expected standard cost, with the actual quantity (AQ) and actual price (AP) that drove the actual cost. When I talk about quantity and price, I could be talking about direct materials, for example the number of chunks of wood that I used to build a table, and the price I paid per chunk of wood. That would be called a direct materials variance analysis. When I talk about quantity and price, I could also be talking about labor cost, for example the number of hours that a software developer spent to write a section of code, and the hourly rate that the software developer is paid. That would be called a labor cost variance analysis. Both of these are areas of spending that I can apply price variance vs efficiency variance analysis to. Here’s the underlying data: the budget, or standard cost, assumed 8 units at $125 per unit, $1000 in total. The actual spend consisted of 6 units at $150 per unit, $900 in total.
The total variance is therefore favorable by $100. Let’s draw a graph to help us in the analysis. Quantity on the horizontal axis, price on the vertical axis. Standard quantity of 8, standard price of $125. Actual quantity of 6, actual price of $150. The third point that is vital in our calculations is actual quantity (AQ) times standard price (SP). We used fewer units, but paid a higher price per unit. The $ savings from the units is indicated in green, the $ of additional spending from a higher price is indicated in red. Actual quantity at the standard price is 6 times $125 is $750. We now have actual quantity (AQ) listed at the top twice, standard price (SP) listed at the top twice, actual price (AP) once, and standard quantity (SQ) once. Price variance revolves around actual price versus standard price. 6 actual units used times $25 of incremental price, leads to an unfavorable price variance of $150. Instead of calling it #pricevariance, I could also call this rate variance, in case we analyze labor hours instead of direct materials. Price variance is actual quantity (AQ) times the difference (delta) between the actual price (AP) and the standard price (SP). Quantity variance revolves around actual quantity used, versus standard quantity used. 2 units less times $125 of standard price, leads to a favorable quantity variance of $250. Instead of calling it quantity variance, I could also call this efficiency variance, or usage variance. Quantity variance is the difference (delta) between the actual quantity and the standard quantity, times the standard price. The total variance of $100 favorable is explained by an unfavorable price variance of $150, more than offset by a favorable quantity variance of $250. Going back to the earlier example, maybe I hired a software engineer with a higher hourly rate, but who codes a lot better and faster. In total, I still save $100.
If you are visually inclined, then the surface area of the rectangles is the key to solving the problem. Go from right to left. Standard quantity times standard price. Deduct the savings from using fewer units. You now have a smaller rectangle representing the actual quantity times the standard price. Add the unfavorable price variance from paying a higher price. The rectangle grows again. In total, the AQ x AP rectangle is still smaller than the SQ x SP rectangle.
Price variance versus quantity variance. Useful calculations to make, to go below the level of total standard cost and total actual cost. Price variance and quantity variance provide important insights into the drivers of cost performance.