Question

The following data relates to company X Ltd for 2019 and 2020:    2019               2020 Used direct material...

The following data relates to company X Ltd for 2019 and 2020:

   2019               2020

Used direct material (kg)                                                 46,000 kg          45,000 kg

Cost direct material (per kg)                                          $11.50               $10.50

Produced (units)                                                              15,000 units     11,000 units

Required:

Calculate the cost effect of growth for direct materials. Show all workings and clearly indicate whether the effect is favourable (F) or unfavourable (U).

Business   Accounting   
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Answer #1

ANSWER:

Cost effect of growth for direct materials

= [Units of input required to produce current output in the prior period - Actual units of input used to produce prior period output] x Prior period input price

= {[(45,000 Kg x (15,000 units ÷11,000 units)] - 46,000 Kg} x $11.50

= [61363.63 Kg - 46,000 Kg] x $11.50

= 15,363.63 Kg x $11.50

=$176,682 Unfavorable

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