Question

8. What is a standard cost variance, and what is the objective of variance analysis? Identify three possible causes for (1) a favorable materials price variance; (2) an unfavorable materials price variance; (3) a favorable materials quantity variance; and (4) an unfavorable materials quantity variance

Answer 1

Standard Cost Variance:

In the beginning of a specific period, normally a year, a budget is prepared for the expenses to be incurred in the year. These budgets are based on past years’ data and current market condition. The Budgeted cost expenses are then compared with the actual expenses incurred during the year at the year end. Variance is used to monitor the costs incurred by a business, with management taking action when a material negative variance is incurred i.e. when actual costs are more than the budgeted or the planned costs.

(1)Possible causes for a favourable Materials Price Variance

- Reduction in Per Unit Cost of Raw Material

- Reduction in Transportation expenses of Raw Material

-Fall in Taxes applicable on Raw Material

(2) Possible causes for an unfavourable Materials Price Variance

- Increase in Per Unit Cost of Raw Material (Inflation)

- Increase in Transportation expenses of Raw Material

-Rise in Taxes applicable on Raw Material

(3) Possible causes for a favourable Materials Quantity Variance

- Lesser quantity of raw material used in one finished product

- Better quality raw material used which is used in lesser proportion

- Reduction in wastage

(4) Possible causes for an unfavourable Materials Quantity Variance

- More quantity of raw material used in one finished product

- Inferior quality raw material used which is used in higher proportion

- Increase in wastage