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ACCA Applied Knowledge · Management Accounting · Reconciliation of budgeted and actual profit

A company buys a cheaper grade of material than standard. The material price variance is $4,000 favourable, but the material usage variance is $6,500 adverse and the labour efficiency variance is $2,000 adverse because of extra rework. What is the total net effect of these three variances on profit?

The net effect is $4,500 adverse. The $4,000 favourable price variance is offset by $6,500 adverse usage and $2,000 adverse labour efficiency, giving 4,000 minus 8,500. The cheaper material saved money on price but caused greater waste and rework.

  1. A$4,500 adverseCorrect
  2. B$8,500 adverse
  3. C$4,500 favourable
  4. D$12,500 adverse

Explanation

Net = +4,000 - 6,500 - 2,000 = -4,500, i.e. $4,500 adverse. The $8,500 option ignores the favourable price variance's sign effect incorrectly by only adding adverse items minus nothing; $12,500 adds all as adverse. The pattern shows the saving on price was outweighed by quality-related costs.

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