Yes they're compatible, however if the wattage of the charger is less than what the MacBook needs, it may not charge while the MacBook is running. That's typically only a consideration when you're using a charger from a smaller MacBook on a larger one. It shouldn't cause a burning smell or other malfunction.
If you're smelling burning, I'd get it checked out. Those things have been known to melt, particularly around the Magsafe connector, or where the cable meets the power brick. Check for frayed wires, etc. But I doubt it's related to using it on a different MacBook.
When measuring the usage of power adapters, it is important to keep in mind the efficiency of the PSU when making calculations.
For PC builders, it's important to ensure that you choose a suitable PSU for the components you intend to use, to ensure it's big enough etc. As such, the rated capacity is shown as what the PSU is capable of delivering, rather than what it uses. So, for example, a 600w rated PC power supply for a desktop computer that is rated at 80% (considered the minimum in order to get the "80 plus" certification) will actually use up 750w at the wall. 750W * 80% = 600W.
For laptops, the maths is often considered the other way around. As you are unlikely to be putting extra drives, graphics cards, PCI cards etc in your laptop, its internal power delivery capability should be of little interest to your average user, but the external wall-draw might be. Given that a laptop power adapter will likely be more efficient (as it is smaller, uses less power, will therefore run cooler, and require less active cooling in terms of fans etc etc), then it wouldn't surprise me to see it up around the 90% efficiency mark. Add to that the fact that your average laptop user should only really need to know the wattage rating when using the laptop somewhere unusual, say a plane, or some other mobile/portable power source, it may well be more useful to know the exterior power rating rather than the internal delivery rating. Therefore, 85W at the wall * 90% efficiency is 76.5W in the laptop, and likely explains the discrepancy.