1. avatar says

    I also realize that with the rule you mentioned, you said that it is the actual purchases at cost minus actual purchases at standard cost nut based on the BPP text i am using it does the reverse of your rule. Which of the rule is correct cause it would affect whether the final amount would be favourable or adverse.

    • Profile photo of John Moffat says

      It does not matter which way round you write the rule – the number will be the same!

      As regards whether it is adverse or favourable, you really should not learn that as a rule – if you are spending more than you should it is adverse, if you are spending less than you expect then it is favourable.

      Certainly learn the rules for the calculations, but you must make sure you understand why variances are favourable or adverse – the exam will not simply test that you have learned rules – it will test your understanding as well.

  2. avatar says

    I watched open tuition for the first time and that lecture on budgeting and variances was amazing. I now know how to calculate variances without memorising the formula. That tutor teaches the concept which is exactly what I needed. Excellent lecturer

    • Profile photo of John Moffat says

      It is valued at standard cost in management accounting,

      The reason (which is explained also in the lecture) is because variance analysis would usually be done every month and it will be silly to keep changing the inventory values each month – some months costs will be higher and some months the costs will be lower, and so we value inventory at what we expect the average cost for the year to be.

      (In practice, there could be good reasons for actually changing the standard cost during the year, but this will not happen in Paper F2 – we always value inventory at standard cost.

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