Need help please with Pev Dec 2005

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Registered Posts: 84 Regular contributor ⭐
Hi

It is task 1.2 question iii) Subdivide the material price variance for paper showing which part is due to changes in the dollar exchange rate and which part is due to other factors.

I have looked at the answers but still don't understand how they have worked it out.

I very much hope someone can help me and accept all help gratefully.

thanks

Marg

• Registered Posts: 88 Regular contributor ⭐
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Actually I would have done the calculation differently. Perhaps you would find my approach clearer.

First, from the question we know the budgeted exchange rate was \$1.80 per £1, so we can work out the flexed cost of the actual quantity in pounds and dollars.

Flexed Budget in £ = 130,000 x £0.50 = £65,000
Flexed Budget in \$ = £65,000 x \$1.80 / £1 = \$117,000

If the exchange rate now changes to \$1.89 per £1, and the price in dollars remains unchanged then we would expect to pay the following in £.

Expected £ cost adjusted for new rate = £1 x \$117,000 / \$1.89 = £61,905

Variation due to exchange rate = £65,000 - £61,905 = £3,095 favorable.

Rest of price variation = £61,905 - £58,500 = £3405 favorable.

The advantage of this method is that once you have worked out the £65,000, you can forget about the price per kg and concentrate on the banking transactions.

Hope this helps! :001_smile:
• Registered Posts: 84 Regular contributor ⭐
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Definite.studies - thank you

definite.studies

Thanks for your very good explanation, I understand it now.

Thanks

Marg