A retail chain sets a budget for inventory holding cost at ₹15,000 per month. At the end of the month, the inventory holding cost incurred is ₹18,500. Calculate the inventory variance, classify it, and suggest a corrective action to keep future costs within budget.
Answer
Inventory variance = ₹3,500 Unfavourable; adopt just‑in‑time procurement and better demand forecasting.
The correct answer is Inventory variance = ₹3,500 Unfavourable; adopt just‑in‑time procurement and better demand forecasting. — Answer the question.
Step-by-step solution
- Compute variance: actual – budget = ₹18,500 – ₹15,000 = ₹3,500.
- A positive variance indicates costs exceeded the budget, hence unfavourable.
- Recommend corrective action: reduce inventory levels via just‑in‑time practices, review reorder points, improve forecasting.
- Answer the question.
Common mistake: Calculating variance as budget minus actual, giving negative sign for an unfavourable result
Concept tested: Inventory holding cost control
Published · How this solution was prepared and checked
← All Controlling questions