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John Moffat.
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humai
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A business is expanding rapidly and buying its materials in variety of countries in variety of currencies. It has exclusive supply delivery contract whereby same logistics expert make all delievries in to its warehouses on a cost plus basis. It pays all delivery charges on a per unit basis
Which of following are valid explanations of adverse material price variance measured to include delivery costs as part of cost per kg delivered
1) Exchange rate movements
2) World wide increase in demand for material
3) World oil price riseSir all above are correct ans but can you please explain me that why these three are correct?
John Moffat
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Because all three will affect the cost of the materials and that is what the materials price variance is measuring.
Exchange rate movements are relevant because they are buying from various countries.
Increase in demand in the world will push up prices.
Oil price rises will increase the cost of delivery.
humai
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But is not the demand inversely proportional to price as per law of demand? So increase in world wide demand of material should reduce the prices?
John Moffat
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What???
Think of anything that you normally buy. Think maybe about buying flour. If the demand for flour goes up but the amount of flour produced stays the same then the price of flour will increase.
humai
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