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

Which situation is the most likely explanation for an adverse material usage variance combined with a favourable labour rate variance?

The likely cause is using less skilled, lower-paid workers. The lower wage rate gives a favourable rate variance, while their inexperience leads to more material waste and so an adverse usage variance. The variances are interrelated through the workforce skill decision.

  1. ALess skilled, lower-paid workers were used and wasted more materialCorrect
  2. BHigher-grade material was bought at a premium
  3. COvertime was paid at a premium rate
  4. DDemand exceeded budget so more units were made

Explanation

Cheaper, less experienced labour lowers the rate paid (favourable) but tends to cause more waste (adverse usage). Premium-priced material would affect price, overtime would make the rate adverse, and higher output is a volume matter not a usage variance.

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