Question

Timothy implemented standard costing at the bakery being operated at one of the outlets of a large cash and carry chain of stores in Thailand. The bakery offers fresh bread, cakes and snacks to shoppers in the store. The materials for bakery are sourced by the bakery manager and the manager is also responsible for its efficient operations. Staff hiring and remuneration is also decided by the bakery manager. Looking at historical data, engineering studies and after interviews with the bakery staff, standards were developed and implemented in 2018. The following data relates to variance report generated by the system from November 2019 to April 2020

	Actual Cost	Direct Materials	Direct Materials	Direct Labor	Direct Labor
Month	(Direct Materials + Direct Labor)	Price Variance	Efficiency / Qty Variance	Rate Variance	Efficiency Variance
November	150,000	10,000 F	5,000 U	100 U	5,000 F
December	155,000	11,000 F	5,200 U	110 U	6,500 F
January	152,000	10,100 F	4,900 U	105 U	7,750 F
February	151,000	3,900 F	2,500 U	195 U	6,950 F
March	125,000	3,000 F	1,000 F	190 U	2,200 F
April	115,000	1,000 F	1,500 F	190 U	2,500 F

Discuss possible reasons for the variances showing up in the report

Answer 1

1.Direct Materials Price Variances are favourable and the reason for the favourable variances is that actual rate of materials were less than standard cost of material being budgeted by the company due to which company has to pay less and as a result of which actual costs tends to be much less than what was actually anticipated.

2. Direct Materials Quantity Variance is adverse for November to February because the actual quantity of material consumed was higher than those anticipated by the company due to various reasons like unavailability of good quality input, sub standard raw materials etc due to which there is more consumption of raw materials and as a result company has to pay more resulting in unfavorable variance for the company.

For the months of March and April the variance is favorable because of the simple reason that the consumption of the material were less than that budgeted by the company highlighting the efficient management of the company and providing a good result for the company.

3. For all the months Direct Labour Rate Variance is adverse this is because of the unavailability of labour due to which actual rates of labour were higher than those budgeted by the company as a result of which more labour cost has to be paid by the company resulting in an adverse variance for the company.

4. For all the months labour efficiency variance is favorable the reason being the availability of skilled labor due to which the labour is able to perform the work in a time that was less than standard set up by the company. As a result of which company has to pay less and the variance results good for the company.