Page 138 - BA2 Integrated Workbook STUDENT 2018

Chapter 7

Variance Amount Reason

Direct labour rate $15,000 A  Standard rate set too low

 Higher pay rises

Direct labour efficiency $10,000 F  Standard hours set too high

 More skilled workers

 Higher grade of material

 More efficient working

Sales price $6,000 F  Higher quality product

 Higher selling price

Sales volume contribution $15,000 A  Quality control problems

 Lower sales volume

3.3 The inter-relationships between variances

We can see from the XYZ example that one variance can be related to another.
Adverse variances in one area of the organisation may be inter-related with
favourable variances elsewhere, or vice versa. For example, if cheaper material is
purchased this may produce a favourable material price variance. However, if the
cheaper material is of lower quality and difficult to process, this could result in
adverse variances for material usage and labour efficiency.

There could also be an impact on the sales variances if the cheaper material affects
the overall quality of the final product. Sales volume could reduce resulting in an
adverse sales volume contribution variance, or the sales price may have to be
reduced which would result in an adverse sales price variance.

Illustrations and further practice

Now try TYU 9

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