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Example 1
A company uses standard absorption costing. 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 Sales price Direct material
profit variance variance price variance
A $15,000 A $2,000 F $8,000 F
B $5,000 A $2,000 A $2,000 F
C $15,000 A $2,000 A $8,000 A
D $5,000 A $5,000 F $5,000 AHello John, I am not sure why “A” is the correct answer, as I have difficulties of working out individual answer. Any chance you can help me on this? Many thanks.
Because the actual profit was 5,000 less that the budgeted profit, the budgeted profit must have been 25,000 + 5,000 = 30,000.
The sales volume variance is the difference between the budgeted profit and the standard profit on actual sales, and is therefore 30,000 – 15,000 = 15,000 Adverse. (so the answer so far has to be either A or C).
The actual profit is 25,000, which is 10,000 more than the standard profit on actual sales. This difference is due to a combination of the sales price and the material price variances.
In total it is a favourable variance, and only in answer A does a combination of the two give a favourable total variance of 10,000.Hi John, Thank you very much for your prompt respond, much appreciated.
You have explained everything way clearer than the answer from the examiner’s report. Thank you very much again.
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