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The formula for the price variance is (AP – SP) × AQ. This variance was calculated using the raw materials standard quantity instead of the actual quantity . The question says "A company isolates its raw material price variance in order to provide the earliest possible information to the manager responsible for the variance." This is the definition of the purchase price variance. The question is worded this way to find out whether you know what the purchase price variance is and what it is used for. Therefore, the "actual quantity" used in the formula should be the raw materials purchased .
The question says "A company isolates its raw material price variance in order to provide the earliest possible information to the manager responsible for the variance." This is the definition of the purchase price variance. The question is worded this way to find out whether you know what the purchase price variance is and what it is used for. The formula for the price variance is (AP – SP) × AQ. Because this is asking for the purchase price variance, we use the actual quantity purchased, not the actual quantity used for AQ. The actual price is given in the question as $2.02 per pound of raw material. The standard price is given in the question as $2.00 per pound of raw material. The actual quantity purchased is given as 500,000 pounds. The purchase price variance = ($2.02 – $2.00) × 500,000 = $10,000 unfavorable.
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The question says "A company isolates its raw material price variance in order to provide the earliest possible information to the manager responsible for the variance." This is the definition of the purchase price variance. The question is worded this way to find out whether you know what the purchase price variance is and what it is used for. This variance was calculated using the raw materials used instead of the raw materials purchased.