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ACCA Applied Knowledge · Management Accounting · Analytical techniques in budgeting and forecasting

A company's raw material price index was 120 in Year 1 (base Year 0 = 100) and 150 in Year 2. Material cost in Year 1 was $48,000. Assuming the same quantity is purchased in Year 2, what is the expected material cost in Year 2?

The expected cost is $60,000. Rebase the Year 1 cost by multiplying by the ratio of the new index to the old index, 150/120, which gives 48,000 x 1.25. Applying 150/100 would wrongly treat the Year 1 cost as base-year cost.

  1. A$60,000Correct
  2. B$57,600
  3. C$40,000
  4. D$72,000

Explanation

Cost in Year 2 = 48,000 x 150/120 = $60,000. Using 150/100 gives $72,000, which wrongly applies the index to the Year 1 cost as if it were base-year cost. Using 120/150 inverts the ratio and gives $38,400-type errors.

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