Causes of Variance (AAT module)

Question 1

What is standard costing?

Answer 1

Standard costing is a key aspect of a business’s budgeting system, allowing for planning, monitoring, and control by comparing standard costs to actual costs to identify variances.

Question 2

What are the three main cost elements in standard costing?

Answer 2

1. Materials
2. Labour
3. Overheads

Question 3

What is the purpose of budgetary planning in standard costing?

Answer 3

Budgetary planning enables businesses to set targets for future accounting periods, ensuring that all employees work towards common goals and that corporate objectives are met.

Question 4

How does budgetary control work in standard costing?

Answer 4

1. Recording actual performance.
2. Comparing it with the budget.
3. Identifying variances and their causes.
4. Taking appropriate corrective action.

Question 5

What are variances, and how are they classified?

Answer 5

Variances are the differences between the standard costs and the actual costs. They can be classified as:

1. Favourable variances: Beneficial for the business.
2. Adverse variances: Detrimental to the business.

Question 6

How is the Budgeted Fixed Overhead Rate (BOAR) calculated?

Answer 6

BOAR = BudgetedFixedOverheads/Budgeted Activity

Activity could be measured in units, labour hours, or machine hours.

Question 7

What is the role of flexing in standard costing?

Answer 7

Flexing adjusts the budget to account for differences between the budgeted and actual volumes:

• Direct materials and labour: Flexed for actual production volume.
• Fixed overheads: Flexed using BOAR to calculate expected costs for actual production.

Question 8

What are the two components of the total fixed overhead variance?

Answer 8

1. Expenditure variance: Difference between budgeted and actual fixed overheads.
2. Volume variance: Difference due to level of activity.

Question 9

What factors can cause a favourable material price variance?

Answer 9

1. Standard set incorrectly.
2. Purchase of lower quality materials.
3. Bulk discounts.
4. Over-supply in the market.

Question 10

What factors can cause an adverse material usage variance?

Answer 10

1. Use of lower quality materials leading to waste.
2. Machine breakdowns.
3. Use of less-skilled employees.

Question 11

What is the difference between a labour rate variance and a labour efficiency variance?

Answer 11

• Labour rate variance: Difference in the rate of pay compared to the standard.
• Labour efficiency variance: Difference in the time taken to complete tasks compared to the standard.

Question 12

What are potential causes of an adverse labour efficiency variance?

Answer 12

1. Use of less-skilled staff.
2. Machine breakdowns.
3. Unfinished training programs.

Question 13

How do linked variances occur?

Answer 13

A decision, such as purchasing lower-quality materials, can cause:

• A favourable price variance due to lower costs.
• An adverse usage variance due to higher waste.
• The net effect must be evaluated.

Question 14

What is a fixed overhead expenditure variance, and what can cause it?

Answer 14

It compares budgeted fixed overheads with actual fixed overheads. Causes include:

• Favourable: Cost-saving actions, such as canceling maintenance.
• Adverse: Unexpected increases or unplanned repairs.

Question 15

How does a fixed overhead volume variance arise?

Answer 15

It arises due to differences in actual production levels compared to the budget, influenced by factors like:

• Increased hours worked = higher volume = favourable.
• Fewer hours worked = lower volume = adverse.

Question 16

What factors can lead to a favourable labour efficiency variance?

Answer 16

1. Use of higher-skilled employees.
2. Improved training.
3. Use of new machinery.

Question 17

What should be done if a variance is partially explained but not fully?

Answer 17

Investigate the unexplained part to identify the root cause, such as changes in supplier or loss of bulk discounts.