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This ones a Variance Analysis Question taken from OT Revision Notes pg#18. Confused with answers mentioned for part b
b) Material Price (Planning) Variance
110,000 kg of material should’ve cost $2.2M (standard – original)
” ” ” revised $2.42M (standard – revised)
Therefore, Material Price (Planning) Variance = $220,000 (A), correct?Since the question clearly states that there was a 10% unexpected increase in the price of materials, shouldn’t this be correct. The correct answer on pg#20, takes into account the revised usage of material/unit. If thats the case, then why aren’t we just concerned about the variance as a result of unexpected price change for the purpose of material price planning variance. Simply, if actual quantity used is 110,000kgs w/ standard price of $2/kg, (for this part of the question) and price was increased by 10%, therefore price variance (planning) is simply 10% of $2.2M.
Why should we be concerned with the fact that 2kgs of material was used per unit instead of something else, for material price variance purpose.?Comments plz…
I must explain what has happened here.
There are two ways of calculating planning and operational variances. They give different answers, but both ways are always accepted by the examiner.
The previous examiner did it one way, and so our lectures and notes (and all the text books and revision kits) used to do it that way.
However, the new examiner does it the other way, and so we changed our lectures and notes to that way (and the current editions of all the study texts and revision kits do it this way as well – last years books did it the other way!!).Unfortunately, your question has prompted me to realise that although I changed the main lecture notes and the lectures to the new way, I completely forgot to change the answer in the revision notes to the new way. I will have them changed immediately.
Using the new way, the answers should be as follows:
Expenditure planning variance:
110,000 kg x (22 – 20) = $220,000 (A)
Expenditure operational variance:
2,300,000 – (110,000 x $22) = $120,000 (F)
Usage planning variance:
55,000 units x (2 – 1.9) = 5,500 kg x $20 = $110,000 (F)
Usage operational variance:
110,000 = (55,000 x 1.9) = 5,500 kg x $20 = $110,000 (A)
I do apologise and thank you for bring it to my attention.
(Everywhere else on the website, it is done the ‘new’ way)
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