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ACCA Applied Skills · Performance Management · Planning and operational variances

Tarn Co originally budgeted a material price of $5 per litre. The revised ex-post price was $6 per litre. The purchasing manager bought 10,000 litres at $5.70 per litre. Which of the following best describes the performance of the purchasing manager?

The purchasing manager performed favourably. The operational price variance is $3,000 favourable, since $5.70 was paid against a realistic revised price of $6. The $10,000 adverse planning variance reflects an unrealistic original standard and is not the manager's responsibility.

  1. AFavourable, because the operational price variance is $3,000 favourableCorrect
  2. BAdverse, because the total price variance is $7,000 adverse
  3. CAdverse, because the planning variance is $10,000 adverse
  4. DFavourable, because the planning variance is $3,000 favourable

Explanation

Operational variance = (6.00 – 5.70) × 10,000 = $3,000 favourable. The planning variance of $10,000 adverse (1 × 10,000) is outside the manager's control, and the total of $7,000 adverse would unfairly penalise the manager. Performance should be judged on the operational variance.

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