FAO Sandy Hood

imeldabye

Hi Sandy
Sorry to bother you again but I have been working through the past papers and have come unstuck with exchange rate variances and how to work out the sub variances. Do you have an easy formula? I understand the concepts behind them but once I try and work out the exchange rate ones I never get the figures right. I find it easiest to apply a Step 1...Step 2... approach but there are so few examples of this in the revision kit, and it came up Dec 2005 PEV.
THanks in advance...:001_smile:

imeldabye

or if anyone else could help.............?!

SandyHood

Step One Establish what the exchange rate is that you want
I gather that as I am writing 1 Euro is worth £0.7151

If you wanted to know what £1 is worth then divide the 1Euro by the £0.7151 i.e. 1.40 Euros = £1

Step Two If you have a standrd price of £50 per kg in £s set at the beginning of the year when 1.25 Euros =£1 you may wish to adjust it to take account of the rise in the value of the £1.
Divide by the value of £1 in Euros at the beginning of the year and multiply by the value of £1 at the time of the purchase.

When 1.25 Euros =£1, 1 Euro = £0.80

So £50 divided by £0.80 multiplied by £0.7151 will give you a revised cost per kilogram. £44.69 to the nearest penny.

So to sum up

1. make sure you know whether to use the Euro to £ or £ to Euro rate
2. Then divide by the rate at the time the standard was set
3. Then multiply by the rate at the time the raw materials were purchased

Now you have a revised standard cost per kg
The part of the material price variance due the change in the exchange rate is found by

• (Original price - Revised price) x amount purchased

The part of the price variance due to the hardwork or otherwise of the purchasing department is

• (Revised price x amount purchased) - actual amount spent
  or
• (Revised price per kg - actual price per kg) x amount purchased

sandy.hood@chichester.ac.uk

imeldabye

Many thanks. This is a real help.