CA Intermediate · Cost and Management Accounting · Standard Costing
Under standard costing, a favourable material price variance combined with an adverse material usage variance most plausibly indicates that:
It most plausibly indicates that cheaper, inferior material was bought. The lower price gives a favourable price variance, but poorer quality leads to extra wastage and so an adverse usage variance. The variances are therefore interrelated.
- ACheaper, inferior material was purchased, causing more wastageCorrect
- BHigher quality material was purchased, reducing wastage
- COutput was lower than budgeted
- DLabour rates were above standard
Explanation
A favourable price variance means material cost less than standard, while an adverse usage variance means more material was consumed than allowed. Together these suggest cheaper, poorer-quality material causing extra wastage. Higher quality material would normally give an adverse price but favourable usage variance.
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