A particular firm with zero material inventory purchased 30 000 kg of material and used 25 000 kg. For control purposes, it is recommended that firms calculate the material price variance at the time of purchase. The variance could alternatively be calculated at the time of usage of that material. Which of the following statements most correctly reflects a comparison of the two methods for this firm?
A) Whether calculated on purchase or usage, both variances will be favourable.
B) Whether calculated on purchase or usage, both variances will be unfavourable.
C) The variance calculated on purchase will be larger than the variance calculated on usage, but in the same direction (favourable/unfavourable).
D) The variance calculated on purchase will be smaller than the variance calculated on usage, but in the same direction (favourable/unfavourable).

Question

Quizplus · Accepted Answer

The material price variance is the difference between the actual cost of materials purchased and the standard cost of materials that should have been purchased. If the material price variance is favourable, it means that the actual cost of materials purchased is less than the standard cost of materials that should have been purchased. If the material price variance is unfavourable, it means that the actual cost of materials purchased is more than the standard cost of materials that should have been purchased.

If the variance is calculated at the time of purchase, it is based on the actual cost of the 30,000 kg of material purchased. If the variance is calculated at the time of usage, it is based on the actual cost of the 25,000 kg of material used.

It is likely that the actual cost of the 30,000 kg of material purchased is different than the actual cost of the 25,000 kg of material used. Therefore, the variance calculated on purchase will be larger than the variance calculated on usage. However, the direction of the variances (favourable or unfavourable) will be the same, as long as the actual cost per kg of material remains constant. Therefore, the correct answer is C.

A Particular Firm with Zero Material Inventory Purchased 30 000