PEV Currency Variances

sloshed

Hi

I am struggling on the variances due to currency variations i.e. exchange rates

Any help would be very much appreciated.

Brian:confused1:

definite.studies

If you have trouble remembering the formulas that use the standard price per unit adusted for a new exchange rate, you could try concentrating on the total price of the actual quantity used instead.

We could redo the Osborne books example on p123 (Chopperdale Furniture Co.) like this:

Original total cost using standard prices = 1500 tonne x £400 per tonne = £600,000

Convert this to the foreign currency using the original exhange rate of $6 per £1
Total standard cost in $ = £600,000 x $6 per £1 = $3,600,000

Since the standard was set the exchange rate has changed to $7.5 per £1. If we want to find the effect of only the currency fluctuation, then we take the total standard cost in $ and convert this back into £ using the new exchange rate:

New total cost in £ = $3,600,000 / ($7.5 per £1) = £480,000.

So we can see that the new cost is £120,000 less than the original standard cost, i.e. a favourable price variation of £120,000 caused by the exchange rate movement alone.

We also know:

Total Price Variation = Price Variation due to Exchange Rate Movements + Price Variation due to Other Factors

In the example the actual cost was £570,000 compared with standard of £600,000 - a favourable variation of £30,000

So £30,000 (F) = £120,000 (F) + (£90,000) (A)

i.e. the price variation due to other factors is £90,000 adverse, meaning the actual price in $ must have increased above the original standard price in $.

Hope this helps!