Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 73

Purchase-Price Variance and Foreign Exchange Rates Applied Materials Science (AMS) purchases its materials from several countries. As part of its cost-control program, AMS uses a standard cost system for all aspects of its operations including materials purchases. The company establishes standard costs for materials at the beginning of each fiscal year.

Pat Butch, the purchasing manager, is happy with the result of the year just ended. He believes that the purchase-price variance for the year will be favorable and is very confident that his department has at least met the standard prices. The preliminary report from the controller’s office confirms his jubilation. This is a portion of the preliminary report:

Total quantity purchased	36,000	kilograms
Average price per kilogram	$50
Standard price per kilogram	$60
Budgeted quantity per quarter	4,000	kilograms

In the fourth quarter, the purchasing department increased purchases from the budgeted normal volume of 4,000 to 24,000 kilograms to meet the increased demands, which was a result of the firm’s unexpected success in a fiercely competitive bidding. The substantial increase in the volume to be purchased forced the purchasing department to search for alternative suppliers. After frantic searches, it found suppliers in several foreign countries that could meet the firm’s needs and could provide materials with higher quality than that of AMS’s regular supplier. The purchasing department, however, was very reluctant to make the purchase because the negotiated price was $76 per kilogram, including shipping and import duty.

The actual cost of the purchases, however, was much lower because of currency devaluations before deliveries began, which was a result of the financial turmoil of several countries in the region.

Patricia Rice, the controller, does not share the purchasing department’s euphoria. She is fully aware of the following quarterly purchases:

	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
Quantity	4,000	4,000	4,000	24,000
Purchase price (per kilogram)	$68	$69	$73	?

Required

1. Calculate purchase-price variances for the fourth quarter and for the year. How much of the price variance is attributable to changes in foreign currency exchange rates?

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2. Evaluate the purchasing department’s performance.

Step 1 of 4

Variance and budget v/s variance:

In costing, variance is a difference occurred between planned, standard or budgeted cost and the actual cost incurred. These variances can be for both cost and revenue. These variances can be favourable or unfavourable.