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Answers

Example 2

The standard cost per unit of raw material was estimated to be $5.20 per unit.
However, due to subsequent improvements in technology, the general market
price at the time of purchase was $5.00 per unit.

The actual price paid was $5.18 per unit. 10,000 units of the raw materials
were purchased during the period.

Calculate the planning and operational materials price variances. Comment on
the results.

AQ × AP = 10,000 × $5.18 = $51,800

Operational variance $1,800 adverse
AQQ × RSP = $10,000 × $5.00 = $50,000

Planning variance $2,000 favourable
AQ × SP = 10,000 × $5.20 = $52,000

Operational variance: the cost per unit was higher than the revised budgeted
cost resulting in the adverse variance. This variance is controllable by
management and should be linked to their performance evaluation.

Planning variance: the improvement in technology resulted in a lower price per
unit and hence a favourable variance. This is a planning difference and is
therefore uncontrollable by management.

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