QUESTION 1

Pharmaflex manufactures medical testing kits for sale to healthcare providers. The company has established the following standard mix for producing one batch of a chemical compound required in one of its kits.

Chemical Grams Standard cost per gram
BD2 84 £3.60
AX4 51 £2.40
YF1 22 £8.10

The compound has a short shelf life and as a result, no opening or closing inventory is held. In the last accounting month, 425 batches of the compound were produced using the inputs shown in the table below:

Chemical Grams Total cost
BD2 35,000 £133,422
AX4 22,175 £55,176
YF1 9,400 £78,612

Variances for the most recent month of production are shown in the table below:

BD2 £7,422 Adverse price variance
BD2 £2,520 Favourable usage variance
AX4 £1,956 Adverse price variance
AX4 £1,200 Adverse usage variance
YF1 £2,472 Adverse price variance
YF1 £405 Adverse usage variance

Required

a) Calculate the total usage, mix and yield variances for the compound.

b) On investigation of the variances, some managers refused to discuss the results on the basis that the price of chemical BD2 has increased by 4% since the standards were set. This price increase was the result of an unexpected change in exchange rates.

Recalculate the variances for chemical BD2 and provide a statement that shows the price and usage variances for BD2 using the planning/operational approach.

c) Critically evaluate the usefulness of variance analysis where variances occur due to changes which are beyond the control of the organisation.