CMA Study Group


  • 1.  Variance

    Posted 12 days ago
    A company's master budget indicated that 50,000 units of finished goods should be produced using 25,000 feet of materials at $4 per foot. The company actually produced 48,000 units of finished goods, purchased 27,000 feet of materials at $4.25 per foot, and used 25,000 feet of materials in production. The direct material efficiency variance is

    *Source: Retired ICMA CMA Exam Questions.

    $4,000 unfavorable.
    $6,000 unfavorable.
    $8,000 unfavorable.

    This answer is incorrect. Material efficiency variance = standard price × (actual quantity of material used – standard quantity of material allowed for actual production volume)
    Material efficiency variance = $4×( 25,000 −(.5× 48,000))
    Material efficiency variance = $4 ×1,000
    Material efficiency variance= $4,000 unfavorable

    It is an unfavorable variance because more material was used than the standard quantity of material allowed for actual production. The standard quantity allowed was calculated by determining the budgeted quantity per unit, (25,000 ft./50,000 units) = .5

    In the above question.... the budgeted quantity used in 25000 mentioned in sentence 1. Next, as you read further, 25000 is again mentioned that it was the quantity that was actually used.
    Since, one of the options is 0. However, that is wrong because it is supposed to be solved as provided above.

    Can someone help as to why  4* (25000- 25000) is not the correct way to solve this question.
                                                 SP*(Quantity Used- Standard Quantity allowed)

    Sanobar Anjum
    Pickering ON

  • 2.  RE: Variance

    Posted 12 days ago
    Hi Sanobar,
    Here's how I think about it.
    The material efficiency Variance arises when the actual quantity differs from flexible budget quantity, NOT master budget (static) quantity.
    The actual quantity is 25000 ft but that is based on actual production of 48000 units.
    The static quantity is also 25000 ft but for a budgeted production of 50000 units.
    see the difference?
    Since the material efficiency variance is a component of the total flexible budget variance. Ask yourself: what is the material that should have been used given the actual level of production?
    Answer: it is the standard cost per unit times the actual quantity.
    Standard cost cost per unit = 25000 / 50000 = 0.5 ft/unit.  Multiplying that by the actual quantity produced (0.5 x 48000) you get 24000 ft which is the material should have been used. What is actual material quantity used? it's 25000 ft given in the question. Now the difference 1000 ft times the standard price $4 = $4000 and the variance is unfavorable because the actual quantity used exceeded the flexible budget quantity ( the one should have been used for actual units).
    Coming to your question, you can clearly notice now that if you compare the actual quantity with the static budget quantity you will be making a mistake calculating zero efficiency variance. why? simply because the actual level of production does not equal the budgeted (Actual is 48000 units but budgeted is 50000 units). Lets just say that the actual production was equal to the budgeted of 50000, in this case the standard quantity would be equal to the actual quantity and there would be no material efficiency variance.
    Hope It helps
    Good luck.

    Adham Mourad