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A chemical company sets a standard cost for a key component at $5 per unit. The firm values inventory at standard cost. The firm plans to purchase 10,000 units during the month of March, but at the end of the month, they realize they actually purchased 12,000 units, at a cost of $4.50 per unit.
What is the firm's Purchase Price Variance (PPV) for the month of March?
To calculate the Purchase Price Variance (PPV), use the following formula:
PPV=(ActualPriceStandardPrice)ActualQuantitytext{PPV} = (text{Actual Price} - text{Standard Price}) times text{Actual Quantity}PPV=(ActualPriceStandardPrice)ActualQuantity
Given:
Standard Price = $5.00 per unit
Actual Price = $4.50 per unit
Actual Quantity = 12,000 units
text{PPV} = ($4.50 - $5.00) times 12,000 text{PPV} = (-$0.50) times 12,000 text{PPV} = -$6,000.00
The negative sign indicates a favorable variance (cost savings). Hence, the PPV for the month of March is ($6,000.00). Leadership and transformation management documents emphasize the importance of variance analysis in controlling procurement costs and ensuring budget compliance. Reference highlight that monitoring PPV helps identify cost-saving opportunities and improve financial performance.
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