BETA COMPANY: A WRITTEN ANALYSIS CASE

In Partial Requirements for BA 2005/BA 206- Managerial Accounting

Presented to the College of Governance and Business
University of Southeastern Philippines-Obrero Campus
Barrio Obrero, Davao City

Submitted to:
Dr. Rosfe Corlae Badoy, CPA

Submitted by:
Garlitos, Joseph Vincent
Gregaa, Mark Angelo
Tubo, Eric

November 2015

BETA COMPANY
I. STATEMENT OF THE PROBLEM
Beta Company produces two products, A and B, each of which uses materials X
and Y. The following unit standard costs apply:

Product A
Product B

Material X
4 lbs. @ $15
6 lbs. @ $15

Material Y
1 lb. @ $9.50
2 lbs. @ $9.50

Direct Labor
1/5 hr. @ $18
1/3 hr. @ $18

During November, 4,200 units of A and 3,600 units of B were produced. Also,
39,000 pounds of X were purchased at $14.40, and 11,000 pounds of Y were
purchased at $9.70; all of these materials (but no other materials) were used
for the month's production. This production required 2,025 direct labor-hours
at $17.50.
Questions:
a) Calculate the material price and usage variances for the month.
b) Calculate the labor rate and efficiency variances for the month.
c) How would your answers to (a) and (b) change if you had been told that
November's planned production activity was 4,000 units of A and 4,000 units
of
B?
d) How would your answers to (a) and (b) change if you had been told that
November's sales were 4,000 units of A and 3,500 units of B?
II. SOLUTIONS
Below are the answers of the said questions of BETA Company.
The materials price variance is the difference between the actual and
budgeted cost to acquire materials, multiplied by the total number of units
purchased. The variance is used to spot instances in which a business may be

overpaying for raw materials and components. In other words, Direct Material
Price Variance is the difference between the actual cost of direct material and
the standard cost of quantity purchased or consumed.
The formula is:
(Actual price - Standard price) x Actual quantity used = Material price variance

1. Calculate the material price and usage variance for the month
1.1. Material Price Variance calculated as follows:
Step 1: Calculate Actual Cost
Actual Cost = Actual Quantity * Actual Price

Material X

39,000

14.40

561,600.00

Material Y

11,000

9.70

106,700.00

Step 2: Calculate Standard Cost of Actual

Quantity
Standard Cost= Actual Quantity * Standard Price
Material X

39,000

15

585,000.00

Material Y

11,000

9.50

104,500.00

Step 3: Calculate the variance

Material Price Variance = Actual Cost - Standard
Cost
Actual Cost
Standard Cost
Material X

561,600.00

585,000.00

23,400.00

Favorable

Material Y

106,700.00

104,500.00

(2,200.00)

Adverse/Unfavorable

21,200.00

Favorable

Total Price Variance

Analysis:

Based on the findings above, the researchers determine the result that if
the material price variance is favourable the following analyses constructed: 1)
Suggests cost effective procurement by the company; 2)An overall decrease in
the market price level; 3)Purchase of materials of lower quality than the
standard (this will be reflected in adverse material usage variance); 4)Better
price negotiation by the procurement staff; 5)Implementation of better
procurement practices (e.g. invitation of price quotations from multiple
suppliers); and 6)Purchase discounts on larger orders.
On the other hand, if the result of material price variance is adverse or
unfavourable, the analyses were gathered by researchers. First, an adverse
material price variance indicates higher purchase costs incurred during the
period compared with the standard. Second, there would be an overall increase
in the market price of materials. Third, acquisition of materials of higher
quality than the standard (this will be reflected in favourable material usage
variance).

Fourth, increase in bargaining power of suppliers. Then, Loss of

purchase discounts due to smaller order sizes. Lastly, there is an inefficient

and ineffective buying practice by the procurement staff.
1.2. Material Usage Variance

2.