Day: August 20, 2021

Alex Ltd compared its budgeted sales figures with its actual sales figures and discovered an adverse variance. 

Alex Ltd should?

Select ONE answer:

1. reduce its advertising budget
2. reduce its inventory levels
3. increase its prices
4. increase its production

Show your workings to arrive at your answer, and explain and justify your reasons:

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This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct – this may result in a reduction in sales due to lack of awareness in the market which would increase the adverse variance
2. Correct – Definition of adverse variance e.g. actual figures are worse than the budgeted figures.  Alex Ltd has unsold inventory.  Therefore Alex Ltd does not need to make additional products, so needs less inventory.
3. Not correct – this may result in demand falling as the prices are higher resulting in a loss of sales for Alex Ltd adding to the adverse inventory.
4. Not correct – this will just result in Alex Ltd having excess inventory rather than reducing the adverse variance

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