Cost price variance can be broken down into two components:
* Material price variance is the difference between the actual cost of materials used in production and their standard cost.
* Labor price variance is the difference between the actual cost of labor used in production and its standard cost.
Cost price variance can be a valuable tool for companies in identifying and controlling costs. By understanding the causes of cost variances, companies can take steps to reduce them and improve their profitability.
Here are some tips for reducing cost price variance:
* Use standard costing. Standard costing is a system of costing that uses predetermined standards for the costs of materials, labor, and overhead. This system helps companies to identify and control costs by providing a benchmark against which actual costs can be compared.
* Control the cost of materials. Companies can control the cost of materials by negotiating with suppliers, using value analysis to find lower-cost alternatives, and reducing waste.
* Control the cost of labor. Companies can control the cost of labor by using time and motion studies to improve efficiency, training workers to be more productive, and paying competitive wages.
* Control the cost of overhead. Companies can control the cost of overhead by reducing the amount of space they use, using energy-efficient equipment, and automating processes.
By following these tips, companies can reduce cost price variance and improve their profitability.