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Question

By reducing the sales price from Rs. 80 per unit to Rs. 78 per unit, the sales manager has succeeded in selling 1000 units more of a product. Which of the following decisive conclusions can be drawn from this?

A. Sales price variance is unfavourable

B. Sales volume variance is favourable

C. Total sales variance is unfavourable

D. Sales activity variance is Rs. 80000 (favourable)

E. Sales price variance is Rs. 2000 (unfavourable)

Choose the correct answer from the options given below:

The correct answer is
A, B and D Only

This solution analyzes the impact of a sales price reduction on sales variances.

Sales Price Variance Analysis

The Sales Price Variance (SPV) measures the difference between the actual revenue received and the revenue that would have been received if the sales had occurred at the standard price.

  • Standard Selling Price = Rs. 80 per unit
  • Actual Selling Price = Rs. 78 per unit
  • Actual Selling Price - Standard Selling Price = Rs. 78 - Rs. 80 = - Rs. 2
  • SPV = (Actual Selling Price - Standard Selling Price) × Actual Quantity Sold
  • SPV = (Rs. 78 - Rs. 80) × Actual Quantity = - Rs. 2 × Actual Quantity
  • Since the actual selling price is less than the standard price, the Sales price variance is unfavourable. Conclusion A is correct.

Sales Volume Variance Analysis

The Sales Volume Variance (SVV) measures the impact of the difference between the actual sales volume and the budgeted or standard sales volume.

  • The reduction in sales price led to an increase of 1000 units sold.
  • An increase in sales volume typically leads to higher profits (assuming positive contribution margin).
  • Therefore, the Sales volume variance is favourable. Conclusion B is correct.

Sales Activity Variance Analysis

The term 'Sales Activity Variance' can be interpreted in context. Here, it likely refers to the revenue associated with the increase in sales activity (volume) at the original price.

  • Increase in Quantity Sold = 1000 units
  • Original Selling Price = Rs. 80 per unit
  • Potential Revenue from the increased activity = 1000 units × Rs. 80/unit = Rs. 80,000
  • Since this represents a positive outcome from increased volume, the Sales activity variance is Rs. 80,000 (favourable). Conclusion D is correct.

Total Sales Variance Evaluation

The Total Sales Variance (TSV) is the sum of SPV and SVV. It represents the overall difference between actual and budgeted sales revenue.

  • TSV = SPV + SVV
  • SPV = - Rs. 2 × Actual Quantity (Unfavourable)
  • SVV = 1000 units × Standard Contribution Margin per unit (Favourable)
  • The net result (favourable or unfavourable) depends on the magnitude of the contribution margin per unit and the actual quantity sold. This cannot be determined definitively.
  • Therefore, concluding that the Total sales variance is unfavourable (Conclusion C) is not a decisive conclusion based solely on the information provided.

Evaluation of Specific Variance Amount

Option E suggests a specific amount for the Sales Price Variance.

  • As calculated earlier, SPV = - Rs. 2 × Actual Quantity.
  • This variance is only Rs. 2000 (unfavourable) if the Actual Quantity Sold was 1000 units. However, the problem states 1000 units *more* were sold, implying the actual quantity is greater than the baseline quantity.
  • Therefore, the statement that Sales price variance is Rs. 2000 (unfavourable) is not necessarily correct. Conclusion E is incorrect.

Final Conclusions on Variances

Based on the analysis:

  • Conclusion A is correct (SPV is unfavourable).
  • Conclusion B is correct (SVV is favourable).
  • Conclusion D is correct (Sales activity variance interpreted as Rs. 80,000 favourable).
  • Conclusion C is uncertain/not necessarily correct.
  • Conclusion E is incorrect.

The correct option includes conclusions A, B, and D.

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Important Questions from Standard costing

  1. Which of the following may be the reasons for a material usage variance?

    (A) Negligence in the use of materials

    (B) Changes in basic prices of materials

    (C) Poor or improper machine handling

    (D) Wastage due to inefficient production methods

    (E) Change in product design requiring usuage different from the standard

    Choose the correct answer from the options given below:

  2. An unfavourable overhead volume variance indicates that:  

  3. As per the information given below, what is the correct material yield variance ?

    Standard input = 100 kg

    Standard yield = 90 kg

    Standard cost per kg of output = Rs. 20

    Actual input = 200 kg

    Actual yield = 182 kg

    Actual cost per kg of output = Rs. 19

  4. What is the total overhead variance in the given month experienced by the XYZ Ltd?

  5. What is the expenditure variance of XYZ Ltd as on given month?

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