Question

Describe the two types of standards on which a standard cost system relies. What are the two direct material variances? What factors can affect each variance and who is generally responsible for each variance?

Answer 1

A standard costing system compares the standard cost and actual cost.

Standard cost is the budgeted cost for actual output and the actual cost is the actual cost incurred.

So the two standards the standard costing system relies are Standard Cost and Actual Cost.

Material cost variance can be classified into two types:

1. Material Price variance

2. Material usage variance

The factors that affect each variance are as follows:

Material price variance is affected by the actual price paid for the materials and the budgeted price of materials. If the actual price is more than budgeted price it results in adverse variance otherwise favourable variance.

Material Usage variance is affected by the budgeted materials for actual output and the actual materials used. If the actual materials used are more than budgeted materials for actual output then it results in adverse variance otherwise favourable variance.

Persons responsible for variances:

Purchase manager is responsible for Material price variance as they are the persons who buy the materials for a particular price.

Production manager is responsible for material usage variance as they are the persond who are responsible for effective usage of materials.

PS: Please use "Thumbs Up" if you are contented with my solution and presentation.