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Medium2 marksMultiple Choice
Budgeting and controlSyllabus DPlanning and Operational VariancesPerformance Evaluation

ACCA · Question 23 · Budgeting and control

Section B - Case 2: AeroLogix

AeroLogix provides drone-based medical delivery. At the start of the year, the standard price for drone propellers was set at $15 each. Due to a global shortage of plastics, the general market price rose to $18 each in March. The purchasing manager managed to negotiate a bulk deal and bought propellers for $17.50 each.

If AeroLogix uses planning and operational variances, how should the purchasing manager's performance be evaluated regarding the price of propellers?

Answer options:

A.

They should be penalized for an adverse total price variance of $2.50 per unit.

B.

They should be penalized for an adverse operational price variance of $2.50 per unit.

C.

They should be praised for a favorable operational price variance of $0.50 per unit.

D.

They should be praised for a favorable planning variance of $3.00 per unit.

How to approach this question

Separate the total variance into planning (original standard vs revised standard) and operational (revised standard vs actual). Evaluate the manager only on the operational variance.

Full Answer

C.They should be praised for a favorable operational price variance of $0.50 per unit.✓ Correct
Total variance = $15 (original) - $17.50 (actual) = $2.50 Adverse. Planning variance = $15 (original) - $18 (revised market) = $3.00 Adverse. This is uncontrollable. Operational variance = $18 (revised market) - $17.50 (actual) = $0.50 Favorable. The purchasing manager beat the current market price, so their operational performance is favorable and they should be praised.

Common mistakes

Evaluating the manager based on the total variance ($2.50 adverse), which unfairly penalizes them for uncontrollable market factors.
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