Question

1. Who is responsible for material cost variances in a business? Explain.

2. who is responsible for material usage variances in a business? Explain.

3. What are the variable overhead variances used for?

4. What advantage if any does a standard cost system have over a traditional system.

Answer 1

1. The purchase manager will be responsible for unfavorable materials price variances in a business. An unfavorable material price variance indicates that actual price at which the materials were procured is higher than the predetermined price set as standard.

2. The production manager would be responsible for unfavorable materials usage variance, unless he can prove that the production inefficiency arose from inferior grade of materials purchased by the purchase manager.

3. Variable overhead variances are used for analyzing whether the rate of variable overheads per unit was within the standard or not, and whether the sctual hours used was higher or lower than the standard allowed.

4. The following are the advantages of standard costing over a traditional system:

a. Standards act as yardsticks against which actuals are compared.

b. Measurement and analysis of variances help in detecting inefficiencies, enabling the management to investigate into their originating causes.

c. It helps to apply the principle of 'Management by Exception', as management can save resources by concentrating on areas giving unfavorable variances only.

d. It helps in responsibility accounting, and makes all the respective managers cost conscious.