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ACCA Applied Knowledge · Management Accounting · Summarising and analysing data

A price index for raw materials was 125 in Year 1 (base year Year 0 = 100) and 150 in Year 2. A material cost $4,000 per tonne in Year 1. Assuming it follows the index, what is its expected price per tonne in Year 2?

The expected price is $4,800 per tonne. To move a price from Year 1 to Year 2, multiply by the ratio of the indices, 150 divided by 125, which is 1.2, so $4,000 rises by 20 per cent.

  1. A$4,800Correct
  2. B$5,000
  3. C$4,600
  4. D$3,333

Explanation

Price in Year 2 = 4,000 × 150/125 = $4,800. Using 4,000 × 125/150 gives $3,333, which inverts the ratio. Adding the 25-point difference as a percentage (4,000 × 1.25 = 5,000) wrongly treats the points change as a percentage of the Year 1 price.

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