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ACCA Applied Knowledge · Management Accounting · Monitoring performance and reporting

A manufacturer buys a cheaper grade of material than standard. The purchase price per kg is lower than standard, but the material is of poorer quality and causes more wastage in production. Which combination of variances is most likely to result?

The likely result is a favourable material price variance with an adverse material usage variance. Cheaper material costs less per kg than standard, but its poorer quality increases wastage, so more material is used per unit of output than the standard allows.

  1. AFavourable material price variance and adverse material usage varianceCorrect
  2. BAdverse material price variance and favourable material usage variance
  3. CFavourable material price variance and favourable material usage variance
  4. DAdverse material price variance and adverse material usage variance

Explanation

Buying cheaper material gives a lower actual price than standard, so the price variance is favourable. The poorer quality causes more wastage, so more kg are used per unit than standard and the usage variance is adverse. The two variances are interrelated, and the price saving may be outweighed by the extra usage.

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