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ACCA Applied Knowledge · Management Accounting · Variance calculations and analysis

Which statement about a possible cause of a favourable material price variance combined with an adverse material usage variance is most likely to be correct?

The most likely cause is buying cheaper, lower-quality material. It costs less than standard, producing a favourable price variance, but it tends to cause more waste and spoilage in production, producing an adverse usage variance.

  1. ACheaper, lower-quality material was bought, causing more wastageCorrect
  2. BHigher-grade material was bought, causing less wastage
  3. CStandard usage was set too loosely
  4. DOutput was higher than budgeted

Explanation

A favourable price suggests material was bought cheaply, for example lower quality. Lower quality commonly causes more scrap and so an adverse usage variance. Higher-grade material would typically give an adverse price and favourable usage. Loose standards would give favourable usage.

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