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Block Co operates an absorption costing system and sells three types of product – Commodity 1, Commodity 2 and Commodity 3. Like other competitors operating in the same market, Block Co is struggling to maintain revenues and profits in face of the economic recession which has engulfed the country over the last two years. Sales prices fluctuate n the market in which Block Co operates. Consequently, at the beginning of each quarter, a market specialist, who works on a consultancy basis for Block Co, sets a budgeted sales price for each product for the quarter, based on his expectations of the market. This then becomes the ‘standard selling price’ for the quarter. The sales department itself is run by the company’s sales manager, who negotiates the actual sales prices with customers. The following budgeted figures are available for the quarter ended 31 May 2013.
Product Budget product Standard selling price Standard variable
and sales unit Per unit Per unit
Commodity 1 30,000 $30 $18
Commodity 2 28,000 $35 $28.40
Commodity 3 26,000 $41.60 $26.40
Block Co uses absorption costing. Fixed production overheads are absorbed on the basis of direct machine hours and the budgeted cost of these for the quarter ended 31 May 2013 was $174,400. Commodity 1, 2 and 3 use 0•2 hours, 0•6 hours and 0•8 hours of machine time respectively.The following data shows the actual sales prices and volumes achieved for each product by Block Co for the quarter ended 31 May 2013 and the average market prices per unit.
Product Actual product and Actual selling price Average market price
Sales units Per unit Per unit
Commodity 1 29,800 $31 $32.20
Commodity 2 30,400 $34 $33.15
Commodity 3 26,000 $41.60 $39.10
The following variances have already been correctly calculated for Commodities 1 and 2:sales priceoperationalvariances
commodity 1: $35,760 adverse
commodity 2: $25,840 favorable
Sales price planning variances
Commodity 1: $65,560 favourable
Commodity 2: $56,240 adverse
Required:(a) Calculate, for Commodity 3 only, the sales price operational variance and the sales price planning variance. (4 marks)
