Variance Analysis

Question 1

What is variance analysis?

Answer 1

A variance is the difference between an expected or planned amount and an actual amount.

Question 2

Reasons for variance analysis

Answer 2

1. Cost control purpose (understand the cost components of a product/service and then take action that will subsequently control the cost)
2. Reconciliation purposes (provides a reconciliatory statement as to why our best estimate is different from our projected figures)
3. Show why we are doing good or bad (helps managers to find answer to good or bad performance)
4. Motivating managers (motivate responsible officers into taking actions that will ensure that the ultimate goal of a company is achieved)

Question 3

Material Price variance

Answer 3

A- may reflect failure by purchasing department to stock most advantageous sources of supply
F- purchase of inferior quality material (wastage)
Level of material price variance will NOT always indicate the efficiency of the purchasing department

Question 4

Material usage variance

Answer 4

Careless handling of materials by production personnel
Purchase of inferior quality materials
Pilferage 
Changes in quality control requirements 
Changes in methods of production

Question 5

Wage rate variance

Answer 5

Least subject to control by management

Causes- wage rates standards not being kept in line with changes in actual wage rates

Question 6

Labour efficiency variance

Answer 6

Use of inferior quality materials
Different grades of labour
Failure to maintain machinery in proper condition

Question 7

Variable overhead variances

Answer 7

Causes- prices of individual items have changed
How efficiently the individual variable overhead items are used
Wastage or efficiency

Question 8

Fixed overhead variance

Answer 8

Whenever actual fixed overheads are less than believed fixed overheads it is favourable
Causes- changes in salaries paid to supervisors
Appointment of new supervisors

Question 9

Sales margin variances

Answer 9

Can only arise because of changes in sales function variances
E.g. selling price and sales quantity