subdividing price variances

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
hi there,

help needed once again!

i need to find out how to subdivide a material price variance into the part that is the difference between actual price and market price, and that due to other causes

any help greatly appreciated!

regards

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:subdividing price variances

    Typically a firm sets the standards ahead of time, what can happen is that the price per litre is affected by a change in the wider market.

    To isolate this within the overall material price variance, and see the performance of the purchasing department it is necessary to split the variance.

    The effect of the difference between the original standard price per litre and the revised price can be found by

    (original standard price per litre - revised standard price) x total litres purchased

    The effect of the difference between the revised standard price per litre and the actual price can be found by

    (revised standard price per litre - actual price per litre) x total litres purchased

    or if the actual price is not shown
    (revised standard price per litre x total litres purchased) - actual cost
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:subdividing price variances

    thanks sandy, but none the wiser im afraid.

    this all came from a central assessment question (NGJ Ltd). task 1.1 b) had asked for all the different variances (they were ok to do) my price variance answer was £41,538 (A).

    task 1.2 b) asks to sub-divide the price variance, so am i right in assuming that the £41,538 (A) should be broken down into two elements i)for the market price and contracted price being different and ii)for other reasons (as the question is worded).......if so, your calculations wouldnt work as my answer brings me this:

    orig st price £12.00 divided by rev st price £13.86 x total 69,230 meters = £59,939

    rev st price £13.86 divided by actual price £12.60 x 69,230 metres = £76,153

    and if this is the correct answer which one is for which reason and why does it not agree with my original price variance from task 1.1.

    sorry but i am totally lost here
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:subdividing price variances

    I'm not sure why you are dividing.
    orig st price £12.00 divided by rev st price £13.86 x total 69,230 meters = £59,939

    rev st price £13.86 divided by actual price £12.60 x 69,230 metres = £76,153

    GG
    These are the ways to work through the variances
      Material Price Varianceoriginal standard price - actual price (£12.00 - £12.60) x 69230 metres as you said £41538 (adverse)
        The part of the material price variance due to revising the standard price original standard price - revised standard price (£12.00 - £13.86) x 69230 metres£128,767.80 (adverse) over 3 times the material price variance above, because the price difference of £1.86 is more than 3 times the £0.60 difference
          The part of the material price variance due to the ability of the purchasing department to negotiate a good price with suppliers: Revised standard price - actual price paid (£13.86 - £12.60) x 69230 metres £87229.80 (favourable)
        • System
          System Posts: 100,534 🤖 Admin 🤖
          Re:subdividing price variances

          These variances should reconcile:
          Material price variance
          due to change in standard price £128,767.80 (A)
          due to the purchasing department £87,229.80 (F)
          Net material price variance £41,538 (A)

          which agrees with the original material price variance value.
        • System
          System Posts: 100,534 🤖 Admin 🤖
          Re:subdividing price variances

          hi again,

          yes, thanks ive got it now - i get so used to dividing things that i automatically did it here - i have now reworked it and yes, i understand.

          i also finally rec'd a new book and when i looked in there, it had the same thing - could have done with that book a few days earlier to avoid all this trauma!!

          thanks again sandy

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