ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement
A company's standard material cost per unit is $40. Actual material cost has been $42 per unit because of price rises, and management responds by investigating the adverse variance and negotiating the price back to $40. Which description is correct?
This is cost control. Management is acting on an adverse variance to bring actual cost back to the existing $40 standard. No permanent reduction below the standard is achieved, and no design or method change has occurred, so it is not cost reduction.
- ACost control, because actual cost is being brought back to the standardCorrect
- BCost reduction, because the unit cost is being lowered
- CValue analysis, because the product design is being changed
- DCost reduction, because a variance was investigated
Explanation
The action brings actual cost back to the existing standard of $40; the standard itself is not lowered. That is cost control. Cost reduction would require a new, lower standard through a permanent change such as redesign or a new method.
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