Module 7 Variance Analysis

Question 1

The seven variances

Answer 1

• Sales volume contribution variance
• Sales price variance
• Material price variance
• Materials usage variance
• Labour rate variance
• Labour efficiency variance
• Fixed overhead variance

Question 2

Causes of Sales volume contribution variance

Answer 2

• Favourable: Increased demand in market, successful marketing or negotiating
• Unfavourable: Decreased market demand, result of competitor action

Question 3

Causes of Sales price variance

Answer 3

• Favourable: Increased demand in market, successful marketing or negotiating
• Unfavourable: Decreased market demand, response to competitor action, an aggressive price cutting strategy, increasing competition or customer demands for lower prices

Question 4

Causes of Materials price variance

Answer 4

• Favourable: Reduction in market prices, unforeseen discounts, successful negotiations, different source of supply
• Unfavourable: Price increase, careless purchasing, late purchasing, change in quantity discounts

Question 5

Causes of Materials usage variance

Answer 5

• Favourable: Higher quality materials – less waste, more effective use of material, errors in allocating material to jobs
• Unfavourable: Wastage in the production process, use of inferior raw materials, theft, stricter quality control, errors in allocating material to jobs

Question 6

Causes of Labour rate variance

Answer 6

• Favourable: Use of apprentices or other lower paid workers
• Unfavourable: Employee wage demands, labour shortages forcing up wage rates, overtime, use of more skilled, expensive workers

Question 7

Causes of Labour efficiency variance

Answer 7

• Favourable: Better employee motivation, better quality equipment or materials, use of more skilled workers, errors in allocating time to jobs when budgeting
• Unfavourable: Poorer motivation, poor quality equipment or materials, lack of sufficient equipment or materials, use of less skilled workers

Question 8

Causes of Fixed overhead expenditure variance

Answer 8

• Favourable: Savings in costs incurred, more efficient use of services
• Unfavourable: Increase in cost of services, excessive use of services, changes in type of services used

Question 9

Problems with Using Standard Costing

Answer 9

1. Variance reports are often out of date
2. To avoid negative variances, workers may put in a big effort towards the end of a month, resulting in an increase in output, but a decrease in quality
3. Direct labour is often not a significant cost, so variances in this item are often not relevant
4. Less material in a product may represent poorer value to a customer

Question 10

Cost variances

Answer 10

• material price variance
• labour rate variance
• fixed overhead
• expenditure variance

Question 11

Operations variances

Answer 11

• material usage variance
• labour efficiency variance