ACCA · Question 31 · Budgeting and control

Section C - Constructed Response 1

Titanium Works manufactures specialized industrial valves for the oil and gas sector. The company uses a standard costing system.

For the month of May, the standard cost card for one industrial valve included:

• Direct Materials: 10 kg at $15 per kg = $150
• Direct Labor: 4 hours at $25 per hour = $100

During May, a global supply chain shock caused the market price of the specific titanium alloy used in the valves to spike unexpectedly to $18 per kg. The Purchasing Manager, anticipating further price increases, rushed to buy materials from a new, unvetted supplier at $17.50 per kg.

Actual results for May (production of 1,000 valves):

• Direct Materials purchased and used: 10,500 kg at $17.50 per kg
• Direct Labor: 4,200 hours at $26 per hour

The Production Manager claims the extra material usage and labor hours were due to the poor quality of the alloy from the new supplier, which was harder to machine and resulted in more scrap.

Requirements:
(a) Calculate the total material price variance and material usage variance. (4 marks)
(b) Calculate the material price planning variance and material price operational variance. (4 marks)
(c) Discuss the performance of the Purchasing Manager and the Production Manager based on your calculations and the scenario provided. (8 marks)
(d) Evaluate whether standard costing remains a useful performance measurement tool for Titanium Works in a highly volatile global market. (4 marks)