A company's actual material usage was less than standard (favourable usage variance), but its price variance was adverse. Which explanation is most likely?
Answer and explanation
Correct answer: D. Higher quality, more expensive material was bought, which gave less waste in production
- Step 1: Buying dearer, higher-quality material would give an adverse price variance.
- Step 2: Better material tends to cause less waste, giving a favourable usage variance.
- Step 3: The opposite pattern would arise from cheaper, poorer material.
Answer
Higher quality, more expensive material was bought, which gave less waste in production.
Why not the others: This would give a favourable price variance and an adverse usage variance. This would affect labour and not explain the pattern in material variances. A standard that is wrong is a possible cause, but it is much less likely than a quality-driven trade-off.
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