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ACCA Applied Knowledge · Management Accounting · Monitoring performance and reporting

A company standard for product X is 4 kg of material at $5 per kg. Actual output was 1,000 units. Purchases and usage were 4,300 kg costing $20,640. Management says a new supplier delivered cheaper material but caused extra waste. What are the material price and usage variances, and is the explanation consistent?

The price variance is $860 favourable and the usage variance is $1,500 adverse, so the explanation is consistent. The cheaper supplier saved $860 on price but the extra 300 kg used cost $1,500 at standard price, giving a net adverse effect of $640.

  1. APrice $860 favourable; usage $1,500 adverse; consistentCorrect
  2. BPrice $860 adverse; usage $1,500 favourable; inconsistent
  3. CPrice $1,500 favourable; usage $860 adverse; consistent
  4. DPrice $860 favourable; usage $1,500 adverse; inconsistent

Explanation

Actual cost of 4,300 kg at standard = $21,500, so price = $21,500 - $20,640 = $860 favourable. Standard usage 4,000 kg; usage = (4,000 - 4,300) x $5 = $1,500 adverse. Cheaper price with higher usage matches the explanation. Option C swaps the amounts.

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