MI – Nov 2020 – L1 – SB – Q4b – Basic Variance Analysis

Calculate material and labour variances for product AB, and list possible causes of each variance.

Question

b. ABC maintains the following standard cost card for product AB:

Item	Standard Quantity	Standard Price	Total Cost (N)
Direct Material A	3kg @ N8 per kg	N24
Direct Material B	5kg @ N6 per kg	N30
Direct Labour	2hrs @ N24 per hr	N48
Variable Overhead	2hrs @ N9 per hr	N18
Total Standard Cost			N120

Actual Results for the Period:

Required:
i. Calculate the following variances:

ii. List TWO possible causes of each of the variances in (i) above. (3 Marks)

Answer

Material price variance
– Changes in market conditions that cause a general price increase for the
material.

– Failure of the purchasing department to seek most advantageous source
of supply

– Purchase of inferior quality materials bought at lower price

– Shortage of material necessitating buying at higher prices.

Material usage variance
– Careless handling of materials – Purchase of inferior quality materials

– Pilferage

– Changes in quality control requirements

– Changes in method of production

Direct labour rate variance
– Negotiated increase in rates not yet reflected in standard

– Unexpected overtime

– Use of a wrong standard rate for operations performed by workers paid with different rates

– Assignment of skilled labour to work normally performed by unskilled
labour.