Question

Standard costing

1) Your organisation has just recorded a favourable direct material quantity variance. What are some of the factors that could have caused this variance?

2) Are any of the factors you listed in your answer to (1) likely to impact on the magnitude of the direct material price variance or the direct labour variances? If so, how?

3) An organisation has just recorded an unfavourable total direct labour variance. What are the possible explanations for such a variance and who is responsible for rectifying such a variance?

4) Favourable variances are good news and therefore require no investigation, whereas unfavourable variances are bad news and do require investigation. Do you agree?

Answer 1

1) A favorable material quantity variance can be caused due to following reasons

· Improvement in production methods

· Improvement in efficiency of process

· Regular training to workers on best manufacturing practices

· Improvement in quality of raw material needed for production process

· Improvement in quality process leading to lower scrap, rework and damages

2) A favorable material quantity variance can lead to unfavorable material price variance if the quality of raw material needed for production purchased from supplier is of superior quality. The cost of purchase can exceed the standard cost per unit.

Direct labor variance can be favorable when there is efficiency in production methods. The improvement in production process and elimination of scrap, rework and damages makes the workers more efficient and requires lower labor hours for actual production. Thus direct labor efficiency variance can be positive

3) A direct labor variance can be bifurcated into labor rate variance and labor efficiency variance. The Human resource department is responsible for labor rate variance and production department is responsible for labor usage variance

Direct labor rate variance can be caused due to

· High demand for labor in market

· Labor shortage in market

· Inefficient negotiation by the human resource department

Direct labor efficiency variance can be caused to

· Inefficiency in production methods

· Higher generation of scrap wastages, damages, etc

· Skill level mismatch of employees

4) No, do not agree with the statement

Both the type of variances needed the investigation to understand the reasons as to why there is a difference in standard cost for actual output and actual cost incurred. Many a times variances are interrelated for example: a high favorable variance of material price can lead to adverse material efficiency variance. Thus management should investigate the material price variance and reasons for the same. Management can investigate the variances based on Management by exception approach where variances are investigated based on exceeding threshold only in order to ensure the benefits of investigation exceed the cost of investigation.