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ACCA Applied Knowledge · Management Accounting · Reconciliation of budgeted and actual profit

Which of the following is the most likely explanation of an adverse material price variance combined with a favourable material usage variance?

Buying higher-quality material is the likely explanation. It costs more than standard, giving an adverse price variance, but it causes less wastage and scrap, so less material is used per unit, giving a favourable usage variance. The other causes produce adverse usage or favourable price effects.

  1. APurchase of higher-quality material that reduced wastageCorrect
  2. BPoorly trained production staff increasing scrap
  3. CObsolete machinery causing higher material losses
  4. DA fall in market prices for the material

Explanation

Higher-quality material costs more per kg, causing an adverse price variance, but it can reduce waste and so give a favourable usage variance. Poor training and obsolete machinery would cause adverse usage. A fall in market prices would give a favourable price variance.

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