Smithton, Inc. makes and sells one product, the standard costs of which are as follows: £ Direct materials (2 kg at £3.00/kg) 6.00 Direct labour (30 minutes at £10.00/hr) 5.00 Fixed overheads 2.50...

Standard Costing And Variance Analysis Calculation And Evaluation Solution
According to the standards set the firm’s income statement should have recorded the following if sales were equal to 1,300 units
 
Flexible Budget
(Using Standard Costs)
Income Statement
    Sales Revenue (1,300 x £20.00)
     
    £26,000.00
    Direct Materials (1,300 x £6.00)
    £7,800.00
     
    Direct Labour (1,300 x £5)
    £6,500.00
     
    Fixed Overheads (1,300 x £2.50)
    £3,250.00
    17,550.00
    Profit Margin
     
    £8,450.00
 
Flexible Budget Variance
Income Statement
     
    ACTUAL
    BUDGETED
    VARIANCE
    Sales Revenue
    £20,000.00
    £26,000.00
    £6,000.00 U
    Direct Materials
    £6,500.00
    £7,800.00
    £1,300.00 F
    Direct Labo
    £5,250.00
    £6,500.00
    £1,250.00 F
    Fixed Overheads
    3,100.00
    £3,250.00
    £150.00 F
    Total Costs
    £14,850.00
    17,550.00
    £2,700.00 F
    Profit Margin
    £5,150.00
    £8,450.00
    £3,300.00 U
 
SUPERVISOR’S REPORT
Further Analysis And Discussion Of The Variances Causes Of The Variances:
 
DIRECT MATERIALS
Direct Material Price Variance
This variance is the difference between the actual purchase price and the standard purchase price of material.  It is calculated as follows:
(Actual quantity purchased × Actual price) − (Actual quantity purchased × Standard price)
(2100 kg x £3.095) – (2,100 kg x £3.00) = £199.50 U (rounded to £200.00 U)
(Assumptions: Actual price per unit a
ived 3.095 is a
ived by dividing 6500 / 2100 Units)
In this case, the firm paid more for its material than it planned to pay. This may have occu
ed because the firm bought material that was of a higher quality than it had planned to buy, or inflation may have taken the price of the material above the standard level. Another possible reason is that the firm was unable to take advantage of expected quantity discounts because it did not purchase as many units as were needed to get such a discount.  The way that material is delivered can also affect the cost of the material since delivery cost or freight is added to the cost of items purchased.
The purchasing manager of a firm is usual the one in control of the purchase of materials.  As such, any unfavourable price variance should be
ought to his/her attention so that the reason for the variance can be isolated and dealt with as quickly as possible to avoid further deviations from the plans of the firm. This will help to reduce the reasons for increase in price of units while acquiring the material and then helping to reduce the input cost for the products manufactured.
At times, someone other than the purchasing manager can be responsible for the unfavourable material price...