CMA Study Group

Variance - purchased or used amount

  • 1.  Variance - purchased or used amount

    Posted 06-16-2021 02:52 PM
    Hello,

    I ran into this question as following

    A company isolates its raw material price variance in order to provide the earliest possible information to the manager responsible for the variance. The budgeted amount of material usage for the year was computed as follows.

    150,000 units of finished goods x 3 pounds/unit x $2.00/pound = $900,000.

    Actual results for the year were the following.

    Finished goods produced 160,000 units
    Raw materials purchased 500,000 pounds
    Raw materials used 490,000 pounds
    Cost per pound $2.02

    The raw material price variance for the year was?
    a. $9,600 unfavorable.
    b. $9,800 unfavorable.
    c. $10,000 unfavorable.
    d. $20,000 unfavorable.

    I fairly implied that the price variance is applied for used amount, which should be 490,000 pounds x (2.02 - 2) = $9,800 unfavorable (option b)
    However, the answer used purchased amount 500,000 pounds x (2.02 - 2) = 10,000 unfavorable (option c)
    If the question asked for purchase price variance, I would agree with the answer. Did I miss anything from the question indicating I should use purchased amount instead of used amount? Or should I use purchased amount for every material price variance?

    Thank you guys.

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    Kien Nguyen
    Unemployed
    Ottawa ON
    Canada
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  • 2.  RE: Variance - purchased or used amount

    Posted 06-17-2021 01:58 AM
    The question asks to provide the earliest possible information responsible for the variance and the earliest information can be provided using the raw materials units purchased as it is the first activity we do before using the raw materials. So we should consider the raw materials units purchased in this case.

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    Sharooq Yoosuf
    Student
    Kasaragod, Kerala
    India
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  • 3.  RE: Variance - purchased or used amount

    Posted 06-17-2021 05:38 AM
    Hi

    The key word is "earliest possible".

    If the question ask to calculate variance as earliest possible , we need to calculate material purchase price variance.

    Regards
    Ratan





  • 4.  RE: Variance - purchased or used amount

    Posted 06-17-2021 07:24 AM
    Raw material price variance and purchase price variance is same.
    So the qty should be 500000 and not 490000






  • 5.  RE: Variance - purchased or used amount

    Posted 06-17-2021 09:29 AM
    Thank you all,

    My professor also confirmed what you told me. When DM purchased is different than used, the amount purchased is used for calculating DM price variance.

    Kind regards,
    Kyle

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    Kien Nguyen
    Unemployed
    Ottawa ON
    Canada
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  • 6.  RE: Variance - purchased or used amount

    Posted 06-18-2021 07:00 AM
    If the question says that the company recognizes materials price variances as early as possible then it is implied that the question is asking for "materials purchase price variance" rather than "material price variance" or ("materials price usage variance"). This statement is found on the beginning of the question.
    A company isolates its raw material price variance in order to provide the earliest possible information to the manager responsible for the variance
    Kien Nguyen,  06-16-2021 02:52 PM
    Because of that, you would use the quantity purchased as the actual quantity in the formula.

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    Ronald Sardona
    Student
    Unisan
    Philippines
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