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Could you please explain how to attempt such questions and how do we derive the answer A out of the information provided.
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 profit variance Sales price variance Direct material 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 AI assume that you have watched my free lectures on variance analysis, and therefore you know how all the variances are calculated.
The sales volume variance is the difference between the budgeted profit and the standard profit on the actual sales. We know that the budgeted profit was 25,000 + 5,000 = 30,000, and so the sale volume variance is 15,000 – 30,000 = 15,000 adverse.
So the correct answer so far must be either A or C.
The other two variances must together explain the difference between the standard profit on actual sales and the actual profit. The total of the two is therefore 25,000 – 15,000 = 10,000 favourable. Only choice A gives a total for these two variances of 10,000 favourable, and so A is the correct answer.
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