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Hi
Product X has a standard direct material cost as follows.
$3 per meter = one unit of X.
Actual cost per unit:
During one month, 6000 meters are bought for $18,600. 5,000 meters are used in production.
Closing inventory has therefore increased with 1,000 units.
Calculate the Direct material price variance.
Can anyone help me with these please?a) For closing inventory valued at standard cost, the price variance is calculated on material purchases in the period.
Direct Material Price variance = $ ?b) Closing inventory valued at actual cost (FIFO), the price variance is calculated on materials used in production in the period.
Direct Material Price variance: $ ?Are both price variances for a and b the following: $ 18600 – $1800 = $600 Adverse Or do they differ? And if they do, how?
Two things:
Firstly in Paper F2 (and F5) variance questions, inventories are always valued at standard cost. (To do differently would be silly – the reason is explain in our free lectures on variances).
Secondly, for the material price variance it would be completely irrelevant anyway. The price variance is always the actual purchases at actual cost compared with actual purchases at standard cost.The correct answer is $600 adverse.
(I do suggest that you watch our lectures. Our free lectures are a complete course for Paper F2 and cover everything you need to pass the exam well.)
I agree. It is always valued at standard cost. 🙂
I’m looking at the definition “The direct material price variance is the difference between the standard cost and the actual cost for the actual quantity of material used or purchased.”
Actual quantity of material used (5000) or purchased (6000)I think what they are getting at is – When Closing Inventory is valued at actual cost (3.10), then variance is calculated on production (5000) as follows:
a) Production at standard cost 5,000 x $3 = $15,000 vs Actual purchases $15,500
The Variance is $500.
vsIf Closing Inventory is valued at standard cost $3, then variance is calculated on purchases (6000) as follows:
b) Purchases at standard cost 6,000 x $3 = $18,000 vs Actual purchases $18,600
The variance is $600.So the difference is the Closing inventory.
So how do we determine which one to use? Your lecture is very helpful thank you.
Only it doesn’t cover the above theories a) and b).I don’t know where you read this definition, but for Paper F2 (and F5), the material price/expenditure variance is always calculated on the materials purchased (not the material used).
(To do otherwise would be carrying forward some of the variance in inventory, which we never do in F2 or F5).
Hi John
It is the definition in F2 BPP study guide. I will use purchases thank you and ignore the Closing inventory deductions so it’s always the same variance. Thank you for your advice 🙂
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