The cost accountant for blue pharmaceuticals has informed youthat the company’s

Question

The cost accountant for blue pharmaceuticals has informed youthat the company’s materials quantity variance for the drugallegro was exactly equal to its materials price variance for theyear. The company’s normal level of production is 50 batchesof Allegro per year. However, due to uncertainties regardingfoundation funding, it produced only 25 batches during the currentyear. Other cost information regarding allegro’s directmaterials is as follows:

Standard price par gram ofmaterial………………………………………………………$60

Actual kilograms purchased and used during theyear…………………………….100kg

Actual cost of materials purchased during theperiod………………………….$6,000,000

Number of grams perkilogram………………………………………………………1,000grams

a. Compute blue’smaterials price variance.

b. Compute the standard quantity ofmaterials allowed per batch of allegro produced.

c. Why would you not expectblue to have a large materials quantity variance?

Explanation / Answer

       MPV = Actual Quantity x (Standard Price - Actual Price)

               = 100,000 grams x ($60/g - $60/g)

               = $0

b.         Given that Blue’s materials price variance equals its materials quantity variance, both variances must equal zero. Thus, the standard quantity of material allowed per batch of Allegro must equal the 4,000 grams actually used

c.         Materials usage in the pharmaceutical industry must be extremely accurate and precise. Thus, one would not expect to see a significant materials quantity variance.

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