Podcast
Questions and Answers
What could lead to a favorable variance in material usage?
What could lead to a favorable variance in material usage?
- Increased waste of materials
- Use of apprentices at lower rates (correct)
- Errors in allocating time to jobs
- Higher quality materials used than standard (correct)
Which of the following factors can result in unfavorable cost variances due to labor issues?
Which of the following factors can result in unfavorable cost variances due to labor issues?
- Wage rate increases (correct)
- Machine breakdowns (correct)
- Utilizing apprentices
- Labour force working efficiently
An increase in the price of which material is most likely to cause an unfavorable cost variance?
An increase in the price of which material is most likely to cause an unfavorable cost variance?
- Defective materials
- Apprentice labor
- Higher grade raw materials (correct)
- Standard materials (correct)
Which situation is categorized as a favorable labor efficiency variance?
Which situation is categorized as a favorable labor efficiency variance?
Which of the following factors does NOT lead to a favorable cost variance due to material pricing?
Which of the following factors does NOT lead to a favorable cost variance due to material pricing?
What is a potential reason for unfavorable variances related to overhead expenditures?
What is a potential reason for unfavorable variances related to overhead expenditures?
Which of the following indicates a negative effect on cost variances due to material issues?
Which of the following indicates a negative effect on cost variances due to material issues?
Which of the following results is typically NOT favorable when considering labor costs?
Which of the following results is typically NOT favorable when considering labor costs?
What factor should be considered when deciding whether to investigate a reported variance?
What factor should be considered when deciding whether to investigate a reported variance?
Which variance is likely to occur when purchasing cheaper materials?
Which variance is likely to occur when purchasing cheaper materials?
What does controllability mean in the context of cost variances?
What does controllability mean in the context of cost variances?
How should the relationship between individual variances be viewed?
How should the relationship between individual variances be viewed?
Why might variances be set using ideal standards?
Why might variances be set using ideal standards?
What should be weighed against the benefits of correcting a variance?
What should be weighed against the benefits of correcting a variance?
What is a likely outcome of a worldwide increase in raw material prices?
What is a likely outcome of a worldwide increase in raw material prices?
What can happen if average price levels are used as standards during times of inflation?
What can happen if average price levels are used as standards during times of inflation?
Which standard would likely lead to variances that are difficult to assess over time?
Which standard would likely lead to variances that are difficult to assess over time?
What is a characteristic of material variances due to purchasing decisions?
What is a characteristic of material variances due to purchasing decisions?
Which factor can lead to a labor efficiency variance that is favorable?
Which factor can lead to a labor efficiency variance that is favorable?
What is a potential reason for an unfavorable material usage variance?
What is a potential reason for an unfavorable material usage variance?
Which situation is most likely to cause an unfavorable labor rate variance?
Which situation is most likely to cause an unfavorable labor rate variance?
Which of the following is an example of a factor leading to favorable overhead expenditure variance?
Which of the following is an example of a factor leading to favorable overhead expenditure variance?
What would most likely result from a decrease in the supply of raw materials while demand remains high?
What would most likely result from a decrease in the supply of raw materials while demand remains high?
Which event is likely to lead to an unfavorable labor efficiency variance?
Which event is likely to lead to an unfavorable labor efficiency variance?
What could potentially cause an unfavorable overhead volume variance?
What could potentially cause an unfavorable overhead volume variance?
Which of the following factors is least likely to contribute to a favorable labor rate variance?
Which of the following factors is least likely to contribute to a favorable labor rate variance?
What is the primary reason that not all cost variances warrant investigation?
What is the primary reason that not all cost variances warrant investigation?
Which factor may indicate that a variance should not be investigated due to its controllability?
Which factor may indicate that a variance should not be investigated due to its controllability?
How does the type of standard used impact the reporting of variances?
How does the type of standard used impact the reporting of variances?
When analyzing variances, what is an important consideration regarding their interdependence?
When analyzing variances, what is an important consideration regarding their interdependence?
What should management consider when setting tolerance limits for variances?
What should management consider when setting tolerance limits for variances?
Why might a company choose to use cheaper materials despite potential negative outcomes?
Why might a company choose to use cheaper materials despite potential negative outcomes?
Which approach is generally not effective for dealing with uncontrollable variances?
Which approach is generally not effective for dealing with uncontrollable variances?
During inflation, what challenge arises when using average price levels as standards?
During inflation, what challenge arises when using average price levels as standards?
What defines the cost of an investigation in relation to variances?
What defines the cost of an investigation in relation to variances?
What is a possible consequence of using ideal standards for reporting variances?
What is a possible consequence of using ideal standards for reporting variances?
Which factor is most likely to contribute to a favorable material price variance?
Which factor is most likely to contribute to a favorable material price variance?
What might lead to an unfavorable labor efficiency variance?
What might lead to an unfavorable labor efficiency variance?
Which factor could cause an unfavorable material usage variance?
Which factor could cause an unfavorable material usage variance?
What is a common cause of unfavorable overhead expenditure variance?
What is a common cause of unfavorable overhead expenditure variance?
Which situation is likely to result in a favorable labor rate variance?
Which situation is likely to result in a favorable labor rate variance?
What could be a major contributor to an unfavorable material price variance?
What could be a major contributor to an unfavorable material price variance?
Which factor would likely not contribute to a favorable labor efficiency variance?
Which factor would likely not contribute to a favorable labor efficiency variance?
What is a potential reason for an unfavorable overhead volume variance?
What is a potential reason for an unfavorable overhead volume variance?
What factor does NOT influence whether a variance should be investigated?
What factor does NOT influence whether a variance should be investigated?
When is a variance typically considered significant enough to warrant investigation?
When is a variance typically considered significant enough to warrant investigation?
How can uncontrollable variances best be managed?
How can uncontrollable variances best be managed?
What is an effect of using ideal standards on variance reporting?
What is an effect of using ideal standards on variance reporting?
Why might managers choose to purchase cheaper materials despite potential issues?
Why might managers choose to purchase cheaper materials despite potential issues?
Which issue can arise from considering individual variances in isolation?
Which issue can arise from considering individual variances in isolation?
Which situation illustrates the interdependence of price and usage variances?
Which situation illustrates the interdependence of price and usage variances?
What must be balanced against the potential benefits of investigating a variance?
What must be balanced against the potential benefits of investigating a variance?
During inflation, what challenge does using average price levels as standards create?
During inflation, what challenge does using average price levels as standards create?
What is a key reason managers should set tolerance limits?
What is a key reason managers should set tolerance limits?
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Study Notes
Reasons for Cost Variances
- Cost variances can arise from various factors like material prices, labor availability, and machinery efficiency.
Overhead Expenditure
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Favorable Material Price Variance:
- Unforeseen discounts in purchasing.
- Changes in material standards or supply-demand dynamics favoring excess supply.
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Material Usage Variance:
- Higher quality materials used than those originally planned.
- Better allocation of materials in job tasks.
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Labor Rate Variance:
- Use of lower-paid apprentices results in favorable variances.
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Labor Efficiency Variance:
- Faster output due to worker motivation or improved equipment/processes.
- Efficient time allocation for tasks, exceeding planned asset utilization.
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Overhead Expenditure Variance:
- Achieved savings through cost reductions and economical service usage.
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Overhead Volume Variance:
- Enhanced efficiency of the labor force or additional overtime work.
Unfavorable Variances
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Material Price Variance:
- Price increases and poor purchasing practices.
- Defective materials and excess waste reduce efficiency.
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Labor Rate Increase:
- Use of higher-grade labor or unexpected wage hikes.
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Labor Efficiency Variance:
- Non-optimal machine performance, sick leave, or labor shortages.
- Errors in job time allocation lead to inefficient work output.
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Overhead Volume Issues:
- Increased use and cost of required services.
Significance of Cost Variances
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Variances should be assessed based on materiality, controllability, type of standard used, interdependence, and investigation costs.
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Materiality:
- Determine significant variances using established tolerance limits for reporting.
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Controllability:
- Some variances may be outside managerial control, necessitating plan adjustments rather than investigations.
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Type of Standard:
- Reports of variances are influenced by the efficiency standards set; ideal standards can lead to universally unfavorable reports.
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Interdependence:
- Variances should be analyzed in conjunction; one variance can influence another, complicating analysis.
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Costs of Investigation:
- Evaluate the cost-to-benefit ratio when investigating variances to determine the necessity of corrective actions.
Interdependence between Variances
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Favorable and unfavorable variances often occur together and can impact overall financial evaluations.
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Materials Price and Usage Variances:
- Cheaper materials might cause higher wastage, difficult to handle, resulting in unfavorable usage variances.
- Purchasing higher-quality (longer service life) materials can lead to unfavorable price variances but may improve usage efficiency.
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