Answered: Calculate the material price and usage…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Secure

Secure makes plastic security cards that restrict access to certain locations. The standard cost card contains the following in respect of plastic:

0.04 kg at £4 per kg = £0.16

Last month, 100,000 cards were produced and 3,500 kg of plastic was used, costing a total of £18,375.

The production manager (who is also responsible for purchasing) claims that the increase in world oil prices pushed up all plastic prices by 20%, and that a world-wide standard for card readers was introduced which required a slightly larger card (and hence increased the amount of plastic needed) by 5%.

Required:

Calculate the material price and usage variance, without reference to the manager’s explanation.
Split each of the price and usage variances into a planning and an operating part (assuming that production manager’s explanations are reasonable).

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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