Page 265 - PM Integrated Workbook 2018-19

Advanced variances

Example 1

Arby Ltd makes sandwiches and other bread-based snacks, which it sells in
bulk to delicatessen shops. The only variable cost is raw material, which
consists mainly of bread and other, lower value ingredients. The standard cost
of the materials used in the manufacture of each kg of product is $4.00.

In preparing its budget for 2017, Arby Ltd assumed a selling price of $6 per
kilogram for its products and sales of 48,000 kilograms.

However, during 2017, Arby and its competitors were adversely affected by
diminishing consumer confidence in bread-based products. Arby sold only
37,000 kilograms of its products.

Arby’s managing director recently explained how his company attempted to
respond to the difficulties it faced in 2017: ‘First, we reduced our selling price
from $6 to $5.95 per kg; this was a modest price reduction in comparison with
those of our smaller competitors. Second, we took advantage of falling market
prices for some of the types of filling we use as a raw material for our product.

Calculate:

(a) The sales price variance

Actual quantity sold 37,000 × actual price $5.95 = $220,150

Price variance
$1,850 A

Actual quantity sold 37,000 × standard price $6 = $222,000

(b) The sales volume variance

Actual quantity sold 37,000 × standard margin $2.00 = $74,000

Volume variance
$22,000 A

Budget quantity sold 48,000 × standard margin $2.00 = $96,000

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