Coffey Company maintains a very large direct materials inventory because of crit

Question

Coffey Company maintains a very large direct materials inventory because of critical demands placed upon it for rush orders from large hospitals. Item A contains hard-to-get material Y. Currently, the standard cost of material Y is $4.00 per gram. During February, 22,000 grams were purchased for $4.10 per gram, while only 20,000 grams were used in production. There was no beginning inventory of material Y.



Required:
a. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the materials purchasing manager.
b. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the production manager.
c. Discuss the issues involved in determining the price variance at the point of purchase versus the point of consumption.

Explanation / Answer

a. Material price variance

= 22,000 *($4.10 - $4.00)

= $2,200 unfavorable

b. Material price variance

= 20,000 * ($4.10 - $4.00) = $2,000 unfavorable

c. Measuring the price variance at the time of materials purchased is desirable in situations where the amount of materials purchased varies substantially from the amount used during the period. Failure to measure the price variance based on materials purchased could result in a substantial delay in determining that a price change occurred.
Also, if the purchasing manager is to be held accountable for his/her purchasing activities, it is appropriate to have the materials price variances computed at the time of purchase so the manager can include the variances on his/her monthly report. This encourages the purchasing manager to be more responsible for the activities under his/her control. It provides a closer relationship between responsibility and authority and becomes a relevant performance measure.

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