FAO Sandy Hood

[imeldabye]

Hi Sandy
Sorry to bother you again but I have been working through the past papers and have come unstuck with exchange rate variances and how to work out the sub variances. Do you have an easy formula? I understand the concepts behind them but once I try and work out the exchange rate ones I never get the figures right. I find it easiest to apply a Step 1...Step 2... approach but there are so few examples of this in the revision kit, and it came up Dec 2005 PEV.
THanks in advance...:001_smile:

[imeldabye]

or if anyone else could help.............?!

[SandyHood]

Step One Establish what the exchange rate is that you want
I gather that as I am writing 1 Euro is worth £0.7151

If you wanted to know what £1 is worth then divide the 1Euro by the £0.7151 i.e. 1.40 Euros = £1

Step Two If you have a standrd price of £50 per kg in £s set at the beginning of the year when 1.25 Euros =£1 you may wish to adjust it to take account of the rise in the value of the £1.
Divide by the value of £1 in Euros at the beginning of the year and multiply by the value of £1 at the time of the purchase.

When 1.25 Euros =£1, 1 Euro = £0.80

So £50 divided by £0.80 multiplied by £0.7151 will give you a revised cost per kilogram. £44.69 to the nearest penny.

So to sum up

make sure you know whether to use the Euro to £ or £ to Euro rate
Then divide by the rate at the time the standard was set
Then multiply by the rate at the time the raw materials were purchased


Now you have a revised standard cost per kg
The part of the material price variance due the change in the exchange rate is found by
(Original price - Revised price) x amount purchased


The part of the price variance due to the hardwork or otherwise of the purchasing department is
(Revised price x amount purchased) - actual amount spent
or
(Revised price per kg - actual price per kg) x amount purchased


sandy.hood@chichester.ac.uk

[imeldabye]

Many thanks. This is a real help.