***Information from QUESTION 8*** Chips, Inc. is preparing the budget for its fi
ID: 2527602 • Letter: #
Question
***Information from QUESTION 8***
Chips, Inc. is preparing the budget for its fiscal year ending on 30 June 2018 (FY2017). The company produces Widgets using the raw material, oximate polyethyl hydroxide (OPH). Three pounds of OPH are needed to produce each Widget. The market price of OPH varies but Chips expects the average price to be $2.80 per pound. Chips plans to sell 510,000 Widgets during FY2017. The table below shows the beginning inventories and planned ending inventories for OPH and Widgets.
Inventories 1-Jul-17 30-Jun-18 OPH: Raw materials (lbs.) 40,000 66,000 Widgets: Finished goods (units) 44,000 41,000Explanation / Answer
Solution:
Cost spend on purchasing OPH = 1525000 * $2.76 = $4,209,000
Budgeted price of OPH = $2.80 per pound
Chips have to spent on purchasing OPH if it paid the budgeted price = Budgeted price * Nos of units purchased
= $2.80 * 1525000 = $4,270,000
Price variance on purchases = Actual cost - Budgeted cost for actual purchases = $4,209,000 - $4,270,000 = -$61,000
Pound of OPH should chips have used in production = SQ per unit * Actual unit produced = 3 * 497000 = 1491000 pound
Actual consumption of OPH = 1515850 pound
Quantity variance related to use of OPH in to production = (AQ - SQ) * SR
= (1515850 - 1491000) * $2.80 = $69,580
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