The purchase is made in emergency

The purchase is made in emergency
A . 2 and 4 only
B. 1 and 4 only
C. 1 and 3 only
D. 2 and 3 only

View Answer

Answer: A

Explanation:

The difference between the standard cost of direct materials specified for production and the actual cost of direct materials used in production is known as Direct Material Cost Variance. Material Cost Variance gives an idea of how much more or less cost has been incurred when compared with the standard cost. Thus, Variance Analysis is an important tool to keep a tab on the deviations from the standard set by a company.

Material Cost Variance can be due to less purchase price being paid than the standard or because of change in the quantity of material used. Thus, Material Cost Variance is made up of two components namely;

Material Price Variance and Material Usage Variance. Among the 4 options:

– ‘The buyer updates purchase-to-pay system to track payment and delivery’: The use of e-procurement system can increase the productivity and create labour cost variance, not material cost variance.

– ‘An unprocessed goods received note is missing’: If a goods received note is missing, the buyer won’t pay for that batch, which create quantity variance.

– ‘The employees must work overtime to catch up with the customers’ orders’: Overtime salary can cause labour variance, not material cost variance.

– ‘The purchase is made in emergency’: Normally, the price in emergency situation is higher than usual. This can cause price variance.

Reference:

– CIPS study guide page 57-59

– Material Variance | Cost, Price, Usage Variance Formula, Example – eFM (efinancemanage-ment.com)

LO 1, AC 1.4