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Hi,
Just a bit of confusion on how to calculate the planning variance for material price and usage!
I was confident in this area until I did a Cima aptitude question and really can’t see why I’m incorrect?
Q:
A manufacturer budgeted to pay £6 per unit for the material based on a budgeted level of production of 56,000 units and using 3kg of material per unit.During the year, actually spent $408,000 on 170,000 kg of material.
Actual production was 60,000 units.It has now discovered that it made a budgeting error and should have planned to pay $2.50 per kg.
What is the material price planning variance?
Now my answer was:
60,000 x 3 = 180,000 @ original rate $2 = £360,000
60,000 x 3 = 180,000 @ new revised rate $2.5 = $450,000
Variance = 360,000 – 450,000 = £90,000 adverse.This isn’t even one of the answers?
It’s either $84,000 which is incorrect at its using the budgeted units
Or $85,000 which apparently is correct but that’s using the actual kg used of 170,000 kg?
Why are they using the actual kg used in this instant and now the actual unit(flexed)?
Hi there,
Thanks for your question… there are different ways to calculate these – so occasionally you can be confused by different answersHowever, price variances are always based on actual volumes…
So for price planning variances we need to compare AQ x original std price. to AQ x revised standard price.
170,000 x 2
170,000 x 2.50So $85,000 is the correct answer.
If you are given the actual volumes in kg then you should use them directly.Hope that helps.
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