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Variance Question: Becker D93 - 1.24


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#1 bbmak

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Posted 04 May 2013 - 06:36 PM

ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for $105,000, and two units of raw material are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for material was $60,000, and there was an unfavorable quantity variance of $2,500. 

The materials price variance for the units used in November was: 

 

 

SP(SQ-AQ), 5(12000-x)=-2500U; x =12500; $5/2=$2.5; 12500 * 2 = 25000

AQ(SP-AP), 25000(2.5-3)= -12,500U

The answer is $12,500 Unfavorable. 

 

I understand all the math parts, but

I don't understand why the 12,000 units of product is treated at SQ Allowed. By reading the question, I thought the 12,000 is AQ used. Can anyone explain this or the correct way to approach this problem?

 



#2 CPAlano

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Posted 04 May 2013 - 11:29 PM

I'll try to help you with the explanation.  Here we go.

 

1. First is the setup:

 

AQ x AP 

       Price Variance

AQ x SP

       Quantity Variance

SQ x SP

 

2. The question provides you with SQ X SP = $60,000

3. Find what the Standard Price (SP) is.

To find SQ, the formula is = Actual Output x Standard per unit

Actual Output = 12,000 Units Produced,  Standard Per Unit = 2 Raw Materials (for every 1 finished unit)

SQ = 12000 x 2 = 24,000

 

Then you plug it in to SQ x SP = 60,000

24,000 x SP = 60,000.  Now solve for SP which equals $2.50

 

4. Since you know that the Quantity Variance is $2,500 Unfavorable, then AQ x SP = 62,500  (60,000 + 2,500)

5. Now find out what AQ is, since you now know that SP is $2.50

AQ x 2.50 = 62,500.  AQ = 25,000

 

6. Actual Price (AP) is provided in the question, just have to solve for it.  $105,000 / 35,000 units purchased = $3.00/unit

 

7. Now, going back to the original setup with all your calculated amounts, you can solve for AQ x AP and then find the price variance.

 

AQ        x    AP

25,000      $3.00  =  $75,000

 

                                             $12,500 Unfavorable

AQ        x   SP

25,000      $2.50  =  $62,500

 

                                             $2,500 Unfavorable

SQ        x   SP

24,000      $2.50  =  $60,000 



#3 bbmak

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Posted 07 May 2013 - 04:26 AM

thx u so for the detail explanation.