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ACCA Applied Knowledge · Management Accounting · Budgetary control and reporting

A manager receives a report showing a large favourable material price variance but an adverse usage variance of similar size. Which interpretation is most appropriate?

The most appropriate interpretation is that cheaper, lower-quality material may have been purchased, leading to more waste and higher usage. Price and usage variances are interdependent, so offsetting amounts should still be investigated rather than ignored.

  1. ACheaper, lower-quality material may have been bought, causing extra wasteCorrect
  2. BThe standard price was set too high, so usage must be wrong
  3. CProduction volume was above budget
  4. DThe variances cancel out, so no investigation is needed

Explanation

A favourable price with an adverse usage variance often indicates cheaper, poorer-quality materials causing more wastage. Variances are interrelated, so netting them off hides this problem. Volume does not directly cause price or usage variances once flexed.

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