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22.17 AD Ltd manufactures and sells a single product, E, and uses a standard absorption costing system. Standard cost and selling price details for product E are as follows.
$ per unit
Variable cost 8
Fixed cost. 2
Standard profit 10
Standard selling price 5
The sales volume variance reported for last period was $9,000 adverse.AD Ltd is considering using standard marginal costing as the basis for variance reporting in future. What would be the correct sales volume variance to be shown in a marginal costing operating statement for last period?
A $6,428(A)
B $6,428 (F)
C $12,600 (F)
D $12,600 (A)Sir I don’t understand how to do this question
I understand in marginal costing that fixed cost is not supposed to be there so Standard Margin would be higher hence leading to a less adverse sales variance
But the problem I have is by how much would this variance reduce?
The fixed cost per unit is $2
But by how much should we multiply this by
We do not multiply it by anything!!!
You have not copies out the question correctly. The standard selling price is not $5, it is $15, and the standard profit is not $10, it is $5.
At the moment they are using absorption costing and therefore they must have sold $9,000/5 = 1,800 units fewer than budgeted.
If the change to marginal costing then the 1,800 units fewer are cost out at the standard contribution per unit of $7, and therefore the variance is 1,800 x $7 = $12,600 adverse.
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