Standard Costing

Question 1

The possible reasons (causes) for variances arising.an all be categorised as one or more of the following:

Answer 1

Measurement errors
Out-of-date standards
Out-of-control operations
Random or uncontrollable factors

Question 2

Possible reasons for variances

Answer 2

general inflation/price increases
currency depreciation for imported materials (forex losses)
changing to a new, more expensive supplier
no longer qualifying for bulk purchase discounts
buying a better quality material (which may link to a favourable usage variance)

Question 3

Responsibility centre is responsible for the variance?

Answer 3

• The purchasing department is responsible for material price and quality

*The HR department for labour rates

*The production department for material usage, labour efficiency, variable overhead expenditure and efficiency and possibly fixed overhead volume.

*The sales department for sales price and volume, sales overheads and possibly fixed overhead volume

Note that with the material price and usage variances sometimes a variance termed the ‘joint price/usage variance’ is calculated which arises when the purchasing department accepts responsibility for the price variance but only for the budgeted quantity (not the excess usage) while the production department accepts responsibility for the excess usage (but only at standard prices) – the joint price/usage variance is therefore calculated as the excess quantity used multiplied by the excess price paid for the materials (this variance is then not allocated to either department).