- 6 Marks
Question
With regard to variance analysis for all production costs (direct material, direct labour, and overhead), it is important to note that each variance does not represent a separate and distinct problem to be handled in isolation. All variances in one way or another are interdependent.
Required:
i) Explain what you understand by the term “inter-relationship between variances.” (2 marks)
ii) Explain possible reasons for inter-relationship between material variances and labour variances. Support your answer with examples. (4 marks)
Answer
i) Inter-relationship between Variances:
The term “inter-relationship between variances” refers to the idea that different variances, such as those related to direct materials, direct labour, and overheads, are not independent of one another. A change or variance in one area can lead to or be influenced by a variance in another area. For instance, a favourable material price variance might lead to an adverse labour efficiency variance if the cheaper material is of lower quality and requires more time to process.
(2 marks)
ii) Examples of Inter-relationship Between Material and Labour Variances:
- Material Price and Labour Efficiency:
- If lower-quality materials are purchased at a lower price (resulting in a favourable material price variance), they may require more handling or lead to higher rejection rates, which in turn could cause workers to spend more time on rework, resulting in an adverse labour efficiency variance.
- Material Usage and Labour Efficiency:
- Poor-quality materials might increase wastage, leading to an adverse material usage variance. This, in turn, could cause workers to spend more time dealing with the wastage, which would again result in an adverse labour efficiency variance.
(4 marks)
- Level: Level 2
- Topic: Standard Costing and Variance Analysis
- Series: NOV 2018
- Uploader: Kwame Aikins