List three causes of a favorable direct materials price variance. (Select three possible answers.)

A. Budgeted purchase prices were set without careful analysis of the market.

B. Materials prices decreased unexpectedly due to industry oversupply.

C. Materials prices increased unexpectedly due to industry shortage.

D. The purchasing manager bought in smaller lot sizes than budgeted, thus not obtaining the purchase discounts that were factored in the budget.

E. The materials purchasing officer negotiated more skillfully than was planned in the budget.

A, B, and E

Explanation:

A. Budgeted purchase prices were set without careful analysis of the market

Budgets are prepared using estimated prices. As much as possible, the budget prices should be the same as market prices. It may happen that during price estimation, some aspects could have been ignored, leading to incorrect purchase prices. It could be possible that the budget prices are overstated. In such a scenario, there would be a favorable price variance to the business.

B. Materials prices decreased unexpectedly due to industry oversupply

The supply and demand forces determine the prices of raw materials. Low supply will lead to an increase in price as many buyers chase few goods. Constant demand and supply create stable prices. A sudden increase in supply will lead to reduced prices, which will cause favorable variances to the business.

E. The materials purchasing officer negotiated more skillfully than was planned in the budget.

The purchasing manager does the actual buying in any organization. Should the manager be a skilled negotiator, the business stands a better chance of buying goods at low prices. In this case, the purchasing manager negotiated for better prices. The results will be a positive price variance for the company.