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.
Ask the Tutor ACCA FA
Variance
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.
So true.
Thank you sir once again.
You are welcome :-)
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