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A company uses a standard absorption costing system. 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 profit variance | Sales price variance | Direct material price variance
$15,000 A | $2,000 F | $8,000 F
$5,000 A | $2,000 A | $2,000 F
$15,000 A | $2,000 A | $8,000 A
$5,000 A | $5,000 F | $5,000 ASir, in this question, I can calculate the sales volume profit variance, but I don’t understand how to calculate the others. Can you help me?
The question does not require you to calculated the variances (and there is not enough information to be able to do this anyway).
It asks which of the combinations is a valid combination which means which of them is possible.
The total of all three variances must be equal to the difference between the actual profit and the original budgeted profit.
The total of the sales price and material price variances must be equal to the difference between the actual profit and the standard profit on actual sales (i.e. the flexed profit).Have you watched our free lectures on variances?
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