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CA Intermediate · Cost and Management Accounting · Standard Costing

Which statement about a favourable material price variance combined with an adverse material usage variance is most consistent with standard costing practice?

Buying cheaper, lower-quality material can produce a favourable price variance while causing greater wastage and an adverse usage variance. Standard costing treats the two variances as interrelated, so management should investigate the cause jointly rather than judge each in isolation.

  1. APurchase of cheaper, lower-quality material may have caused excess wastageCorrect
  2. BIt proves that the purchase department is inefficient
  3. CIt shows that the standard price was set too high
  4. DIt indicates labour was highly efficient

Explanation

A favourable price variance with adverse usage often arises when cheaper, inferior material is bought and more is consumed through wastage or rejects. The variances are interrelated and should be analysed jointly, not read as proof of inefficiency or labour performance.

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