Financial Performance question, help!!!

alexp19740

Keta operates a standard costing system and uses raw material C2X which is a global commodity. The standard price was set based upon a market price of £450 per litre when the material price index for C2x was 120.50. the following information has been gathered.
• The price index increased to 126.525 in June x3
• The raw material price variance for June x3 was £375,000 adverse
• 12500 litres of material C2x were purchased in June
Complete the statements below in order to calculate your answers, you should split the raw material price variance into two components by calculating the part of the variance explained by the change in the price index and the part of the variance not explained by the changes in the price index.

a) The part of the variance explained by the increase in the price index £
b) The part of the variance not explained by the increase in the price index £

Lucy_M

You need to work out the first variance to get the actual price paid, so 12500ltrs at £450 is £5625000, if the actual price paid is adverse then by adding the variance amount to the standard then we know what was actually paid, 5625000 + 375000 = 6000000.

Now you need to adjust the standard price for the increase so 450/120.5 x 126.525 = 472.5

And now work out the variance again with the new standard price.

6000000 - 5906250 = 93750 adverse (12500 x 472.5 = 5906250)

The difference between the two variances is the part explained by the price increase (375000 - 93750) and the variance of 93750 is the part not explained by the price change.

Hope that makes sense and my formatting doesn't end up as one long paragraph...

alexp19740

Thanks Lucy, much appreciated.