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ACCA Applied Knowledge · Management Accounting · Variance calculations and analysis

An operating statement shows a favourable material price variance, an adverse material usage variance and an adverse labour efficiency variance. Which of the following is the most likely single explanation for all three?

The most likely explanation is that cheaper, lower-quality materials were bought. These save money on price but cause more waste and slower, more difficult working, so material usage and labour efficiency both go adverse while the price variance is favourable.

  1. APurchase of cheaper, lower-quality materialsCorrect
  2. BPurchase of higher-grade materials than standard
  3. CAn unexpected rise in hourly wage rates
  4. DSales volume higher than budget

Explanation

Cheaper material explains the favourable price variance. Lower quality leads to more waste, which gives the adverse usage variance, and more difficult handling or rework, which takes longer and gives the adverse efficiency variance. Higher-grade materials would produce the opposite price pattern. A wage rise affects the labour rate variance, and sales volume does not drive these variances.

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