Question

In order to indicate to managers the trend and materiality of variances, a business firm expresses them as percentages as in the following examples where (A) indicates an adverse variance and (F) indicates a favorable variance. July August September Material price variance as a % of standard cost of material used 1% (A) 2% (F) 7% (F) Material usage variance as a % of standard total production cost3% (F) 4% (A) 6% (A) The following statements relate to recent operational events. 1) In September the buyer located a new supplier who charged a lower price than the previous supplier. The material was found to be a low quality, however, leading to a high level of waste. 2) The general trend is that all direct material variances are becoming more significant and are likely to be worthy of management attention 3) A change in the bonus payment scheme has improved the productivity of employees, who are now converting raw materials into finished products more effectively. Which of the statements is or are consistent with the results shown?

Answer 1

Statement 1 and 2 are consistent with results shown reasons are as under:

Statement 1- Material prices have decreased which should show favourable trend in September. You can see there is a 5% favourable change between August and September. Further as the quality of material was not good it should lead to adverse trend compared to prior period. This is evident from the results as there is a 2% adverse varaince between August and September.

Statement 2- Quality of material was not good in Sep although price was less this brought a adverse increase in material variance and waste % incresed in September.