A & G makes wrought iron table and chair sets. During April, the purchasing agen
ID: 2364983 • Letter: A
Question
A & G makes wrought iron table and chair sets. During April, the purchasing agent bought 25,600 pounds of scrap iron at $1.94 per pound. During the month, 21,400 pounds of scrap iron were used to produce 600 table and chair sets. Each set requires a standard quantity of 35 ounds at a standard cost of $1.90 per pound.A. For April, compute the direct material price variance (based on the quantity purchased) and the direct material quantity variance (based on quantity used).
Identify the titles of individuals in the firm who would be responsible for each of the variances.
Provide some possible explanations for the variances computed in part a.
Explanation / Answer
Direct materials price variance (MPV) formula: [Materials Price Variance = (Actual quantity purchased × Actual price) - (Actual quantity purchased × Standard price)] ie MPV = (25600*$1.94) - (25600*$1.90) = $1,024U A material price variance is called unfavorable materials price variance if the actual price of materials purchased is more than the standard price of materials purchased. Who is Responsible for Material Price Variance? Generally speaking, the purchase manager has control over the price paid for goods and is therefore responsible for any price variation. Many factors influence the price paid for the goods, including number of units ordered in a lot, how the order is delivered, and the quality of materials purchased. A deviation in any of these factors from what was assumed when the standards were set can result in price variance. For example purchase of second grade materials rather than top-grade materials may be a reason of favorable price variance, since the lower grade material will generally be less costly but perhaps less suitable for production and can be a reason of unfavorable materials quantity variance. However, someone other than purchasing manager could be responsible for materials price variance. For example, production is scheduled in such a way that the purchasing manager must request express delivery. In this situation the production manager should be held responsible for the resulting price variance. Materials quantity Usage variance (MQV) Formula: [Materials quantity variance = (Actual quantity used × Standard price) - (Standard quantity allowed × Standard Price)] ie MQV = (21400*1.90) - ((600*35)*$1.90) = $760U Above calculation shows an unfavorable direct materials quantity variance. When materials are used more than what is allowed by standard an unfavorable quantity variance occurs. If materials used is less than the quantity allowed a favorable direct materials quantity variance occurs. Who is Responsible for Material Quantity Variance? Excessive usage of materials that is usually a reason of unfavorable direct materials quantity variance may be due to inferior quality of materials, untrained workers, poor supervision etc. Generally speaking production managers are held responsible for this variance. However purchasing department may also be held responsible for purchasing materials of inferior quality to economize on prices. Where purchasing department purchases low grade direct materials at low prices to show a favorable materials price variance, the materials quantity variance is usually unfavorable due to inferior quality of direct materials. A word of caution is in order. Variance analysis should not be used as an excuse to conduct witch hunts or as a means of beating line managers and workers over the head. The emphasize must be on control in the sense of supporting the line managers and assisting them in meeting the goals that they have participated in setting for the company. In short, the emphasize should be positive rather than negative. Excessive dwelling on what has already happened, particularly in terms of trying to find someone to blame, can destroy morale and kill any cooperative spirit.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.