Question

For control purposes, it is usually preferable to calculate the materials price variance:

A. At the point of purchase (i.e., when the materials are purchased).
B. At the point of production (i.e., when the materials are issued to production).
C. At the end of the accounting period.
D. Only if the materials quantity variance is significant in amount.
E. Only if it is controllable by operating managers.

Answer 1

Materials price variance should be calculated at the point of purchase or use rather than at the end of the accounting period, to enable timely corrective action and improve profit-maximizing strategies. It should also be calculated when controllable by operating managers to impact average total cost, average variable cost, and marginal cost decisions.

Step-by-step explanation:

For control purposes, it is usually preferable to calculate the materials price variance at the point of purchase or when the material is used in production, rather than at the end of the accounting period. This allows management to quickly identify variances and take corrective action, ensuring that any issues with materials cost can be addressed promptly and do not negatively impact the profit-maximizing strategies of the firm.

Additionally, variances should indeed be calculated if they are controllable by operating managers, as this can lead to more insightful cost management and can influence their strategic decisions concerning average total cost, average variable cost, and marginal cost. Understanding these cost measures is crucial for analyzing the firm's cost structure from a long-run perspective, thereby affecting the long-term profitability and market competitiveness of the business.