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A company uses standard absorption costing. Actual profit last period was $25,000, which was $5,000 less
than budgeted profit. The standard profit on actual sales for the period was $15,000. Only three variances
occurred in the period: a sales volume profit variance, a sales price variance and a direct material price variance.
Which of the following is a valid combination of the three variances?
Sales volume Sales price Direct material
profit variance variance price variance
A $15,000 A $2,000 F $8,000 F
B $5,000 A $2,000 A $2,000 F
C $15,000 A $2,000 A $8,000 A
D $5,000 A $5,000 F $5,000 A
The correct answer is A.My doubt is how to arrive at direct material and sale price variances in the question above.
The question does not require you to calculate the variances (and you can’t because there is not enough information). It simply asks which is a valid (i.e. possible) combination.
The volume variance is he difference between the budget profit (30,000) and the standard profit on actual sales (15,000) and so is 15,000 Adverse. That means the answer is either A or C.
The difference between the actual profit (25,000) and the standard profit in actual sales (15,000) is 10,000 Favourable. Therefore the total of the sales price and the materials variances must be 10,000 Favourable. This only occurs in option A.
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