Requirement 2: Explain why the following variances that you calculated may occur

Question

Requirement 2: Explain why the following variances that you calculated may occur.     1. Direct materials price variance: give 2 possible reasons     2. Direct materials effiency varieance: give 2 possible reasons     3. Direct labor price variance: give 2 possible reasons     4. Direct labor effiency varieance: give 2 possible reasons     5. Production volume variance: give 1 reason Requirement 2: Explain why the following variances that you calculated may occur.     1. Direct materials price variance: give 2 possible reasons     2. Direct materials effiency varieance: give 2 possible reasons     3. Direct labor price variance: give 2 possible reasons     4. Direct labor effiency varieance: give 2 possible reasons     5. Production volume variance: give 1 reason

Explanation / Answer

1. a. If there is difference in actual price of the Direct material and its standard price, direct material price variance would occur.(It may result if the material is procured from alternate sources, resulting in price difference)

b. Even if the direct material price is constant, if the other costs included in the cost of material varies (eg., frieght, handling expenses etc.,), there would be Direct material price variance.

2. Reasons for occurence of Direct material efficency variance:

a. Usage of cheap & inferior quality of material to save cost.

b. Pilferage, theft or wastage of material used in production.

3. Reasons for Direct labour price variance:

a. If budgeted for unskilled persons for production, but used skilled persons at higher rate, or vice versa may result in variance in rate.

b. Due to demand, if workers are to be procured at higher rate than budgeted, may result in variance.

4. Reasons for Direct labour efficiency variance:

a. Due to stoppage of work for variance reasons like production issues, power issues etc., idle time increases, which results in variance.

b. Low employee morale, increase in training hours for new people may increase efficiency variance.

5. Production Volume variance - Reason:

The more or less units produced than budgeted, results in volume variance. The volume of production would vary depending on the efficiency of the production team, simplification of tasks, favourable work environment etc.,

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