Skip to content

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

Kestrel Components budgeted to buy 10,000 kg of material at $5.00 per kg for production of 5,000 units (2 kg per unit). Actual production was 5,000 units, using 10,800 kg bought at $4.80 per kg. Which statement best describes the variances and what they imply for the purchasing manager's performance review?

The price variance is $2,160 favourable (0.20 x 10,800 kg) and the usage variance is $4,000 adverse (800 kg x $5). The cheaper purchase may have involved lower quality material that increased wastage, so the variances are interrelated and should be judged together.

  1. APrice variance $2,160 favourable and usage variance $4,000 adverse; the favourable price may be linked to lower quality causing higher usageCorrect
  2. BPrice variance $2,160 adverse and usage variance $4,000 favourable; purchasing overspent
  3. CPrice variance $2,000 favourable and usage variance $4,320 adverse; usage is the purchasing manager's fault
  4. DPrice variance $2,160 favourable and usage variance $4,320 adverse; the two are unrelated

Explanation

Price variance = (5.00 - 4.80) x 10,800 = $2,160 favourable. Usage variance = (10,800 - 10,000) x $5.00 = $4,000 adverse. Option C uses the wrong bases, and the pattern suggests the cheaper material may have been poorer quality, so the variances are interdependent.

Did you get it right without looking?

One question tells you little. A timed set on Cost and management accounting shows your real accuracy, how long you take and where you lose marks.

Practise Cost and management accountingFree diagnostic mock

More Cost and management accounting questions