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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

A manufacturer using a standard costing system finds that the material price variance has been adverse for six months after a key supplier was replaced following a sustainability audit. Which interpretation is most appropriate for management accounting purposes?

The adverse variance stems from a deliberate sourcing decision, so it is partly a planning variance rather than poor buying. If the new supplier is permanent, the standard should be revised, and managers should be judged on controllable operational variances only.

  1. ATreat the variance as partly uncontrollable and planned, and revise the standard if the new supplier is permanentCorrect
  2. BPenalise the purchasing manager because adverse price variances always indicate poor buying
  3. CIgnore the variance because standards must never be changed
  4. DTreat it as a usage variance caused by production inefficiency

Explanation

The variance results from a deliberate decision, so it is not simply poor buying. If the change is permanent, the standard is out of date and should be revised, with the variance split into planning and operational elements.

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