How does the drop in the price of eggs impact Kellogg\'s° variances for its Eggo
ID: 2514127 • Letter: H
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How does the drop in the price of eggs impact Kellogg's° variances for its Eggo Homestyle waffles? ? OCTOBER 17, 2017 BY DR.VENDYTIETZ, CPA, CMA,CSCA, CGMA -..COMMENTS In 2015, when the avian flu hit egg producers hard, there was a shortage of eggs. Egg prices increased dramatically. Over the years since 2015 however, egg production has ramped back up as egg producers have restocked their flocks of egg-laying chickens. There is now a glut of eggs, putting causing the price of eggs toO greatly decrease. Butte 10 are used in many products, including 190 0 ice cream, cream pies, eggrolls, marshmallows, lollipops, meatloaf, and pasta. Kellogg's Eggo waffles are among products that use eggs. Fun fact: The average American eats 250 eggs per year, according to Business Insider ("10 things you never knew about eggs," 3/3/2017.) Questions 1 Which of the Eggo waffle variances would be impacted by the drop in the price of eggs? 2. Would the drop in the price of eggs cause a favorable or unfavorable variance for Kellogg's? 3. What is Kellogg's likely to do to its standard(s) based on the current price of eggs? Which standard(s) would be impacted?Explanation / Answer
1. One needs to understand thatKellogg;s Eggo waffles is using eggs as it's raw material. If the raw material cost goes down, the cost of prodiuction of finished goods will automatically come down. While computing Direct Material variance, Kelloggs will discover that Direct material price variance is appearing as positive. This is due to decline in price of eggs (raw material). Standard price set at the beginning of year has remained constant throughout the year while egg prices are dropping which will show a steady increase in gap between standard price & purchased price.
2. Drop in the price of eggs will cause a favourable material price variance. Fall in price of raw material will decrease the unit cost of production and ultimaterly increasing the profit as well.
3. If Kelloggs estimate that egg prices will remain lower in future ahead, kelloggs may revise it's standard cost for an egg. If the organisation revised the standard price for egg, Direct material price favorable variance will start coming down and will show the correct picture over the period.
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