Financial Performance question

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Good morning everyone. Could someone help me with a quick question from Osborne online learning

It's test 1 question 2:

A company that produces Betas has standard cost information of 0.45kg of material at £50.00 per kg for each Beta

During September, 6,000 Betas were produced, using 2,760 kg of material that cost £137,600.

Complete the following table using the drop down menus to show the material variances.

Direct material price variance:
Direct material usage variance:
Total direct material variance:

Thanks everyone for the help and I hope you all enjoy your weekends

Nps

Hello,

First start by writing down

AQ x AP (actual quantity times actual price)
AQ x SP (actual quantity times standard price)
SQ x SP (standard quantity times standard price)

Adding the correct figures gives you
AQ X AP = 137600 (given in question)
AQ X SP = 138000 (2760kg x £50)
SQ X SP = 135000 (6000 x 0.45kg x £50)

The difference between lines 1 & 2 is the price variance (as only the price has changed). 400F
The difference between lines 2 & 3 is the usage variance (as only the quantity has changed). 3000A
Finally the difference between lines 1 & 3 is the total materials variance (or the sum of the above two answers). 2600A

When deciding whether the variances are Fav or Adv, just look at it logically. What actually happened and is it better or worse than what was hoped for. The first line shows what actually happened so if that value is better (ie lower) than anything you compare it too, then the variance must be favourable. The middle line is partially what happened (correct quantity but only theoretical price) so if it is better/lower than the bottom line (none of which actually happened - theoretical quantity and price), then it must be favourable too. The overall variance is the total of answers 1 and 2 so will be either positive or negative, hence F or A, but ultimately, ask yourself, was the actual cost better or worse than the theoretical/standard cost.

This format also works for some of the other variances, you just need to substitute the quantity/price for whatever the variance is asking for, and to remember the format
A x A
A x S
S x S

I found variances to be the most difficult thing in level 4 yet this method simplified it enormously for me.

Cookiex

Thanks for the answer Nps1976 but i still can't figured it out. Would it be possible for you to show your workings? Thank you again for your answer and I hope you enjoy your weekend.

Nps

I've edited my post to show the three workings and to add a bit more explanation.

Cookiex

Thank you again for you answer Nps1976 you made it very simple to understand.

mhep

Nps1976,

I just wanted to say Thank you. I am sitting the Financial Performance test tomorrow for the second time, and your explanation and tips just made a huge difference. At least with this, I feel that I have a chance.

Kind regards,

Nps

Glad I could help.

Good luck tomorrow.

James Patterson

Nps wrote: »

Hello,

First start by writing down

AQ x AP (actual quantity times actual price)
AQ x SP (actual quantity times standard price)
SQ x SP (standard quantity times standard price)

The difference between lines 1 & 2 is the price variance (as only the price has changed). 400F
The difference between lines 2 & 3 is the usage variance (as only the quantity has changed). 3000A
Finally the difference between lines 1 & 3 is the total materials variance (or the sum of the above two answers). 2600A

This is an amazing method, saved me alot of confusion, thankyou NPS

amyjayne27

This formula is amazing!

It really has helped me get my head around variances so thanks Nicola from me too!

Nps

Glad you all found it useful.

So long as you remember the AAASSS order, and then add the extra bits (quantity/price for usage or hours/rate for labour - I remember it as QP as in QPR, and HR, as in HR department). I think this way really highlights what the variance is actually showing you too, rather than just remembering a formula and not really understanding what the answer means.