MODULE 4 - 15 THE REASONS FOR COST VARIANCES

Questions and Answers

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?

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?

Defective materials

Apprentice labor

Higher grade raw materials (correct)

Standard materials (correct)

Which situation is categorized as a favorable labor efficiency variance?

Higher output than expected Signup and view all the answers

Which of the following factors does NOT lead to a favorable cost variance due to material pricing?

Careless purchasing Signup and view all the answers

What is a potential reason for unfavorable variances related to overhead expenditures?

Excessive use of services Signup and view all the answers

Which of the following indicates a negative effect on cost variances due to material issues?

Material shortages Signup and view all the answers

Which of the following results is typically NOT favorable when considering labor costs?

Unexpected labor strikes Signup and view all the answers

What factor should be considered when deciding whether to investigate a reported variance?

Materiality Signup and view all the answers

Which variance is likely to occur when purchasing cheaper materials?

Unfavorable labor efficiency variance Signup and view all the answers

What does controllability mean in the context of cost variances?

Some variances cannot be controlled even if their cause is known Signup and view all the answers

How should the relationship between individual variances be viewed?

Variances may be interdependent Signup and view all the answers

Why might variances be set using ideal standards?

To always report unfavorable variances Signup and view all the answers

What should be weighed against the benefits of correcting a variance?

Costs of investigation Signup and view all the answers

What is a likely outcome of a worldwide increase in raw material prices?

Uncontrollable variances for management Signup and view all the answers

What can happen if average price levels are used as standards during times of inflation?

Favorable price variances may be temporary Signup and view all the answers

Which standard would likely lead to variances that are difficult to assess over time?

Ideal standards Signup and view all the answers

What is a characteristic of material variances due to purchasing decisions?

They can be interrelated with usage variances Signup and view all the answers

Which factor can lead to a labor efficiency variance that is favorable?

Increased worker motivation and improved processes Signup and view all the answers

What is a potential reason for an unfavorable material usage variance?

Excessive waste in production Signup and view all the answers

Which situation is most likely to cause an unfavorable labor rate variance?

A wage rate increase for existing skilled workers Signup and view all the answers

Which of the following is an example of a factor leading to favorable overhead expenditure variance?

More economical use of services Signup and view all the answers

What would most likely result from a decrease in the supply of raw materials while demand remains high?

Increase in material costs Signup and view all the answers

Which event is likely to lead to an unfavorable labor efficiency variance?

Illness or injury to workers Signup and view all the answers

What could potentially cause an unfavorable overhead volume variance?

Unexpected machine breakdowns Signup and view all the answers

Which of the following factors is least likely to contribute to a favorable labor rate variance?

Wage increases for skilled laborers Signup and view all the answers

What is the primary reason that not all cost variances warrant investigation?

Investigating every variance would be cost-prohibitive. Signup and view all the answers

Which factor may indicate that a variance should not be investigated due to its controllability?

A global rise in raw material prices. Signup and view all the answers

How does the type of standard used impact the reporting of variances?

The efficiency level set affects the variances reported. Signup and view all the answers

When analyzing variances, what is an important consideration regarding their interdependence?

One unfavorable variance may arise from another favorable one. Signup and view all the answers

What should management consider when setting tolerance limits for variances?

Materiality is essential in determining significant variances. Signup and view all the answers

Why might a company choose to use cheaper materials despite potential negative outcomes?

To achieve a favorable price variance. Signup and view all the answers

Which approach is generally not effective for dealing with uncontrollable variances?

Investigating the causes of past variances. Signup and view all the answers

During inflation, what challenge arises when using average price levels as standards?

They may show favorable variances at the start and unfavorable later. Signup and view all the answers

What defines the cost of an investigation in relation to variances?

It can be outweighed by the benefits of correcting the variance. Signup and view all the answers

What is a possible consequence of using ideal standards for reporting variances?

It can consistently lead to unfavorable variances. Signup and view all the answers

Which factor is most likely to contribute to a favorable material price variance?

Unforeseen discounts received Signup and view all the answers

What might lead to an unfavorable labor efficiency variance?

Machine breakdowns Signup and view all the answers

Which factor could cause an unfavorable material usage variance?

Excessive waste Signup and view all the answers

What is a common cause of unfavorable overhead expenditure variance?

Errors in allocating overhead costs Signup and view all the answers

Which situation is likely to result in a favorable labor rate variance?

Use of apprentices at lower pay rates Signup and view all the answers

What could be a major contributor to an unfavorable material price variance?

Decreased supply of raw materials Signup and view all the answers

Which factor would likely not contribute to a favorable labor efficiency variance?

Use of substandard materials Signup and view all the answers

What is a potential reason for an unfavorable overhead volume variance?

Output lower than the standard set Signup and view all the answers

What factor does NOT influence whether a variance should be investigated?

Employee satisfaction Signup and view all the answers

When is a variance typically considered significant enough to warrant investigation?

When it is above the set materiality threshold Signup and view all the answers

How can uncontrollable variances best be managed?

By adapting future plans to avoid similar issues Signup and view all the answers

What is an effect of using ideal standards on variance reporting?

May always result in unfavorable variances Signup and view all the answers

Why might managers choose to purchase cheaper materials despite potential issues?

To achieve immediate favorable price variances Signup and view all the answers

Which issue can arise from considering individual variances in isolation?

Overlooking interrelated effects between variances Signup and view all the answers

Which situation illustrates the interdependence of price and usage variances?

Choosing low-quality materials raises prices but also increases wastage Signup and view all the answers

What must be balanced against the potential benefits of investigating a variance?

Cost of investigation Signup and view all the answers

During inflation, what challenge does using average price levels as standards create?

Unfavorable price variances at the beginning of the period Signup and view all the answers

What is a key reason managers should set tolerance limits?

To identify which variances are significant and actionable Signup and view all the answers

Study Notes

Reasons for Cost Variances

Cost variances can arise from various factors like material prices, labor availability, and machinery efficiency.

Overhead Expenditure

Favorable Material Price Variance:
- Unforeseen discounts in purchasing.
- Changes in material standards or supply-demand dynamics favoring excess supply.
Material Usage Variance:
- Higher quality materials used than those originally planned.
- Better allocation of materials in job tasks.
Labor Rate Variance:
- Use of lower-paid apprentices results in favorable variances.
Labor Efficiency Variance:
- Faster output due to worker motivation or improved equipment/processes.
- Efficient time allocation for tasks, exceeding planned asset utilization.
Overhead Expenditure Variance:
- Achieved savings through cost reductions and economical service usage.
Overhead Volume Variance:
- Enhanced efficiency of the labor force or additional overtime work.

Unfavorable Variances

Material Price Variance:
- Price increases and poor purchasing practices.
- Defective materials and excess waste reduce efficiency.
Labor Rate Increase:
- Use of higher-grade labor or unexpected wage hikes.
Labor Efficiency Variance:
- Non-optimal machine performance, sick leave, or labor shortages.
- Errors in job time allocation lead to inefficient work output.
Overhead Volume Issues:
- Increased use and cost of required services.

Significance of Cost Variances

Variances should be assessed based on materiality, controllability, type of standard used, interdependence, and investigation costs.
Materiality:
- Determine significant variances using established tolerance limits for reporting.
Controllability:
- Some variances may be outside managerial control, necessitating plan adjustments rather than investigations.
Type of Standard:
- Reports of variances are influenced by the efficiency standards set; ideal standards can lead to universally unfavorable reports.
Interdependence:
- Variances should be analyzed in conjunction; one variance can influence another, complicating analysis.
Costs of Investigation:
- Evaluate the cost-to-benefit ratio when investigating variances to determine the necessity of corrective actions.

Interdependence between Variances

Favorable and unfavorable variances often occur together and can impact overall financial evaluations.
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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Description

This quiz explores 15 reasons for cost variances, focusing on material prices, labor rates, and overhead expenditures. Understand how changes in resource availability and efficiency impact overall costs. Test your knowledge of the factors that can lead to favorable and unfavorable variances.