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Variance

YYujin10y ago
Hello, Sir. I'm here with another question. A company manufactures a single product. An extract from a variance control report together with relevant standard cost data is shown below. Standard direct material cost (10kg × $4 per kg) $40 per unit Actual results for January Total direct material cost $4,800 Direct material price variance $1,600 adverse Direct material usage variance $800 favourable The actual production in January was ………… units. __________________________________________ The formula that I know is [1] Actual Quantity x Actual Price = xxx [2] Actual Quantity x Standard Price = xxx [3] Standard Quantity x Standard Price = xxx ________________________________________ Price = [1] + [2] ; when [1] is lesser than [2] = Fav. Usage = [2] + [3] ; when [3] is lesser than [2] = Fav. Then, I thought "Total direct material cost $4,800" is the value of [1]. Therefore, I put $3,200 as [2]. Moreover, I brought down Std. P as $4/kg from the given and I got 800kg for Actual Quantity. However, it was totally wrong when I checked the answer which was 100. From this point, honestly, I'm not sure what this question is asking. Would you please explain step-by-step? Thank you very much.
John MoffatJohn MoffatTutor10y ago#1
If the price variance is 1600 adverse, then it means they spent more than they should have done. So the standard cost of the actual purchases must have been 4800 - 1600 = 3200. That means that they must have purchased 3200/4 = 800 Kg of material. The usage variance was favourable, and so they must have use less material than expected. They should have used 800 - 800/4 = 600 kg of material. Since it is 4kg per unit, it means they must have produced 600/4 = 150 units. You should not simply learn formulae - the examiner deliberately (and always) asks questions that check that you understand and have not just learned formulae.
YYujin10y ago#2
So true. Thank you sir once again.
John MoffatJohn MoffatTutor10y ago#3
You are welcome :-)
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