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ACCA Applied Knowledge · Management Accounting · Monitoring performance and reporting

A company's standard cost for a product is 3 kg of material at $4 per kg. For 1,000 units, 3,300 kg were purchased and used at a total cost of $12,540. Management says that the adverse usage variance was caused entirely by buying lower quality material that gave a favourable price variance. What is the net material variance, and is the claim of an overall saving supported?

The net material variance is $540 adverse. The price variance is $660 favourable, but the usage variance is $1,200 adverse because 300 kg extra were used at $4. The price saving was more than offset, so there was no overall saving.

  1. A$540 adverse net; the cheaper price did not give an overall savingCorrect
  2. B$540 favourable net; the cheaper price gave an overall saving
  3. C$1,200 adverse net; the cheaper price did not give an overall saving
  4. D$660 favourable net; the cheaper price gave an overall saving

Explanation

Standard cost for 1,000 units is 3,000 kg x $4 = $12,000. Actual cost is $12,540, so the net variance is $540 adverse. Price variance: 3,300 x $4 = $13,200 less $12,540 = $660 favourable. Usage variance: (3,000 - 3,300) x $4 = $1,200 adverse. Net is $1,200 - $660 = $540 adverse, so the price saving was outweighed.

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