Question

Forrest Corp uses a standard cost system and has calculated the following variance for May:

Direct Materials Price Variance	$20,000 Unfavorable
Direct Materials Usage Variance	$40,000 Favorable
Direct Labor Efficiency Variance	$20,000 Favorable

Which of the following statements below BEST explains the possible performances tradeoffs that could have occured?

A. Higher priced materials were more difficult to work with resulting in less efficient use of direct materials

B. Cheap direct materials resulted in more waste causing inefficient usage of direct materials

C. Higher priced materials were easier to work with resulting in more efficient use of direct materials

D. Cheap direct materials resulted in less waster causing efficient usage of direct materials

Answer 1

Answer)

The correct option the given question is Option (C )

Justification:

(A) Higher priced materials were more difficult to work with resulting in less efficient use of direct materials

Justification: This option is incorrect. Though the Actual price of material was higher than its Standard Price (evident form Unfavorable Material Price Variance), but the materials were used efficiently (evident from Favorable Material Usage Variance).

(B) Cheap Direct Materials resulted in more wastage causing inefficient usage of direct materials

Justification: This option is incorrect. It is because neither the materials were cheap (evident form Unfavorable Material Price Variance), nor were they used inefficiently (evident from Favorable Material Usage Variance).

(C) Higher price materials were easier to work with resulting in efficient use of direct materials

Justification: This option is Correct. It is because the materials were higher priced (evident form Unfavorable Material Price Variance), which resulted in their efficient utilization (evident from Favorable Material Usage Variance).

(D) Cheap price materials resulted in less wastage causing efficient use of direct material

Justification: This option is Incorrect. It is because the materials were not cheap (evident form Unfavorable Material Price Variance), though it is true that they were efficiently utilized (evident from Favorable Material Usage Variance).