ECONOMICS

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COST ACCOUNTING

STANDARD COSTING AND VARIANCE ANALYSIS

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
For product DR, the material price variance for the month of August was $1, 000 favourable and the material usage variance was $300 adverse.The standard material usage per unit is 3 kg, and the standard material price is $2 per kg.500 units were produced in the period. Opening inventories of raw materials were 100 kg and closing inventories 400 kg.What were the material purchases in the period?
A
1, 350 kg
B
1, 950 kg
C
1, 590 kg
D
2, 000 kg
Explanation: 

Detailed explanation-1: -Vmp = (Actual Quantity Purchased * Actual Unit Cost)-(Actual Quantity Purchased * Standard Unit Cost). When the Actual Materials Price is higher than the Standard Materials Price, the variance is said to be unfavorable, since the Actual price paid on materials purchased is greater than the allowed standard.

Detailed explanation-2: -The formula for this variance is:(standard quantity of material allowed for production – actual quantity used) × standard price per unit of material.

Detailed explanation-3: -Reasons for adverse material price variance include: An overall hike in the market price of materials. Loss of purchase discounts due to smaller order sizes. Purchase of materials of higher quality than the standard (this will be reflected in favorable material usage variance) Increase in bargaining power of suppliers.

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