[NinaSun]

The controller for Durham Skates is review the production cost report for July. An analysis of direct material costs reflects an unfavorable flexible budget variance of $25. The plant manager believes this is excellent performance on a flexible budget for 5000 units of direct material. However, the production supervisor is not pleased with this result as he claims to have saved $1200 in material cost on actual production using 4900 units of direct material. The standard material cost is $12 per unit. Actual material used for the month amount to $ 60,025.

If the direct material variance was investigated further, it would reflect a price variance of:

a $850 unfavorable

b $2,500 favorable

c $1,225 unfavorable

d $1200 favorable

The answer is C.

Actual price=60025/4900=12.25

Price variance=4900(12.25-12)=1225.

My question is why they use 4900 instead of 5000 as actual volume. I remember price variance should use purchased volume. While 4900 is volume used.

AUD-74,75 11/2014
REG-80 04/2015
FAR-74, 91 11/2015
BEC-79 08/2015

[spatel15]

Hm…I just got here from FAR, so I honestly don't know how the book does it, but class always taught me the following:

Start with volume/quantity variance. <–there's some different names I think.

Next do Price Variance.

So if you start with volume variance:

5000*12 = Master Budget = 60K

but ya only made 4900 so…

4900*12 = Flexible Cost Based on Actual Volume = 58800 (Favorable Volume Variance of $1200 from Master)

Next Price Variance:

From the info ya got a simple calculation for Price variance: Real Cost – Flexible Budget based on actual volume.

60025-58800 = 1225 (Unfavorable Price Variance from Flexible Cost)

[spatel15]

By doing that you get 3 columns, with room in between each to figure out the variance due to each.

Actual —-PriceVar

---

Flexible —-VolVar.—Master

Start right to left so..

Master = Standard Vol*Standard Rate

Flexible = Actual Vol*Standard Rate <—Note Volume is first, standard rate still here

Actual = Actual Vol*Actual Rate <—Last change is the actual price rate.

The differences between each major column=PriceVar and VolVar.

[Anonymous]

@NinaSun regarding your question at the bottom of your post:

The price variance is calculated based on actual use. The problem tells us that 4900 were used in actual production, according to the production supervisor.

The flexible budget amount of 5000 just says that based on the level of output achieved, they would have anticipated using 5000 units. The flexible budget doesn't necessarily tell us what was purchased, as such I don't see the number of purchases given in this problem.

If quantity purchased and quantity used were both given, I'd still go with quantity used. It seems to me the focus on these calculations is usually usage, not purchased amount. Purchased but not used material doesn't flow through to production costs; those costs remain in raw materials.

[NinaSun]

Thank you @BobRobbins. Very clear explanation, I understand it now

AUD-74,75 11/2014
REG-80 04/2015
FAR-74, 91 11/2015
BEC-79 08/2015

[Author]

Replies