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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Strategic Cost & Performance Management

Case: Ganga Textiles Ltd found its material usage variance was Rs 15,000 adverse, but investigation showed that the purchase department bought cheaper, lower-grade yarn, causing extra wastage. Which approach to variance analysis best reflects this?

The company should recognise that the variances are interdependent and evaluate the favourable price variance with the adverse usage variance. The cheaper, lower-grade yarn caused the wastage, so responsibility lies partly with purchasing, and the net effect on cost should be judged.

  1. ATreat the usage variance as controllable by production and ignore purchasing
  2. BRecognise the interdependence of variances and assess the favourable price variance together with the adverse usage varianceCorrect
  3. CIgnore the usage variance because the price variance is favourable
  4. DRevise the standard price immediately to the lower price

Explanation

Variances can be interrelated, so a favourable price variance may cause adverse usage. Responsibility should be assessed jointly, comparing net effect and attributing cause to purchasing. Blaming production alone or ignoring the usage variance misses the cause.

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