MA: Standard costing

Answer: C. Material price variance = (Standard price − Actual price) × Actual quantity purchased. Standard price = £5/kg. Actual price = £7,150 ÷ 1,300 = £5.50/kg. Price variance = (£5.00 − £5.50) × 1,300 = −£0.50 × 1,300 = −£650. Adverse because actual price exceeded standard. The material usage variance is separate: Standard quantity for actual production = 400 × 3 = 1,200kg. Actual = 1,300kg. Usage variance = (1,200 − 1,300) × £5 = −£500 adverse. This question tests the price variance only — a common error is to combine price and usage into a single figure.

Answer: D. Labour efficiency variance = (Standard hours for actual production − Actual hours) × Standard rate. Standard hours for 500 units = 500 × 2 = 1,000 hours. Actual hours = 1,100 hours. Efficiency variance = (1,000 − 1,100) × £12 = −100 × £12 = −£1,200 adverse. Workers took longer than standard, hence adverse. The labour rate variance is separate: (£12 − £13,200/1,100) × 1,100 = (£12 − £12) × 1,100 = £0. The actual rate equals standard rate here, so all the cost overrun is explained by the efficiency variance. £1,400 and £600 do not follow from the 100-hour difference at £12.

Answer: A. Fixed overhead absorption rate (OAR) = £60,000 ÷ 12,000 = £5 per unit. Fixed overhead absorbed = 11,000 × £5 = £55,000. Budgeted fixed overhead = £60,000. Volume variance = Absorbed − Budgeted = £55,000 − £60,000 = −£5,000 adverse. Production was 1,000 units below budget, so £5,000 of fixed overhead was under-absorbed. The volume variance measures whether actual production differed from budgeted production — it has nothing to do with the actual cost of fixed overheads (that is the expenditure variance).

Answer: A. Standard quantity for actual production: 600 units × 5 kg = 3,000 kg. Actual quantity used: 3,100 kg. Material usage variance = (Standard quantity − Actual quantity) × Standard price = (3,000 − 3,100) × £8 = −100 × £8 = £800 ADVERSE — option A. The company used 100 kg more than the standard allowance, which is a worse-than-expected result, hence adverse. Option B (£800 favourable) reverses the direction — the most common error, arising from subtracting standard from actual rather than actual from standard. Option C (£1,600) uses a 200 kg difference in error. Option D (£400) applies the wrong rate.

Answer: A. Labour rate variance = (Standard rate − Actual rate) × Actual hours, or equivalently: Standard cost of actual hours − Actual cost. Standard cost of 650 hrs = 650 × £14 = £9,100. Actual cost = £7,700. Rate variance = £9,100 − £7,700 = £1,400 FAVOURABLE — option A. Paying less per hour than standard is a favourable result. Option B (£1,400 adverse) reverses the direction. Options C and D (£700) both use half the actual hours. Note: option D (£700 adverse) equals the labour efficiency variance — (standard hours 600 − actual hours 650) × £14 = £700 adverse — making it an excellent distractor for students who confuse rate and efficiency variances.

Answer: A. Sales volume variance = (Actual volume − Budgeted volume) × Standard contribution per unit = (4,600 − 5,000) × £18 = −400 × £18 = −£7,200 adverse. Actual sales were below budget — adverse. The examiner's report confirms this should use contribution (not profit) in a marginal costing system. Option B incorrectly labels it favourable. Option C calculates 4,600 × £18. Option D calculates 5,000 × £18.

Answer: B. The variance reconciliation bridges budgeted profit to actual profit, explaining each driver of the difference. It is a powerful management control tool. Variances do not need to net to zero (A) — actual and budgeted profit rarely match exactly. Variances supplement, not replace, actual profit reporting (C). Adverse variances have many causes — some are outside management control (e.g. an unexpected price increase from a supplier) and do not automatically indicate poor management (D).

Answer: C. In dynamic environments — where input prices, product specifications, or processes change frequently — standard costs become stale and variances reflect standard obsolescence rather than operational performance. This is a well-recognised limitation of traditional standard costing. Standards are expressed numerically — they are inherently quantitative (A is wrong). Standard costing can be used with both absorption and marginal costing (B is wrong). Standard costing originated in manufacturing (D is wrong).

Answer: D. The material price variance compares standard price to actual price for the quantity purchased. An adverse price variance means the actual price exceeded standard — caused by factors such as emergency purchases, supplier price increases, or purchasing from a non-preferred supplier. Option A describes the material usage variance (quantity, not price). Option B would affect labour efficiency and possibly material usage but not the price variance directly. Option C (selling price) is a sales variance, unrelated to material cost.

Answer: A. Labour efficiency variance = (Standard hours for actual output − Actual hours) × Standard rate. Favourable means actual hours < standard hours — work was completed faster than expected. This could reflect improved methods, better equipment, or a more skilled workforce. Option B describes the labour rate variance. Option C describes a volume difference — if more units were produced, standard hours would increase, and the variance depends on whether actual hours also increased proportionally. Option D describes a cost reduction, not an efficiency variance.

Answer: D. Fixed overhead expenditure (or spending) variance = Budgeted fixed overhead − Actual fixed overhead = £90,000 − £86,000 = £4,000 favourable. Actual overheads were less than budgeted — a favourable outcome (spent less than planned). Adverse would mean actual exceeded budget. This is distinct from the volume variance (which compares absorbed OH to budgeted OH).

Answer: C. Sales price variance = (Actual price − Standard price) × Actual quantity = (£38 − £40) × 3,500 = −£2 × 3,500 = −£7,000 adverse. The actual selling price was below standard — adverse. This is distinct from the sales volume variance (which compares actual to budgeted volume at standard contribution). Option A incorrectly labels it favourable. Option B is total actual revenue. Option D is a miscalculation.

Answer: D. Idle time variance = Idle hours × Standard rate = (820 − 760) × £15 = 60 × £15 = £900 adverse. Idle time is always adverse — the business paid for labour that produced nothing. This is separate from the labour efficiency variance (which compares productive hours to standard hours for output achieved). Machine breakdown causing idle time is typically outside the production manager's control but within the maintenance department's responsibility. £12,300 values all 820 paid hours and £11,400 all 760 productive hours at the standard rate; neither is a variance.

Answer: C. Standard hours for actual production = 400 × 3 = 1,200 hours. Variable overhead efficiency variance = (Standard hours − Actual hours) × Standard rate = (1,200 − 1,300) × £6 = −100 × £6 = −£600 adverse. Actual hours exceeded standard — inefficiency in labour time also causes more variable overhead to be incurred. The expenditure variance is separate: (Actual hours × SR) − Actual VOH = (1,300 × £6) − £8,450 = £7,800 − £8,450 = −£650 adverse. £850 and £450 do not follow from the figures, and the £650 expenditure variance is a separate figure.

Answer: D. Planning variance = Original standard − Revised standard = £10 − £12 = −£2/kg adverse (the standard was too optimistic). Operational variance = Revised standard − Actual price = £12 − £12.50 = −£0.50/kg adverse (purchasing paid more than even the revised standard). Total = £2.50/kg adverse. This split separates uncontrollable external factors (planning) from controllable purchasing performance (operational). Option A assigns everything to planning. Option B assigns everything to operational.

Answer: A. Reconciliation — start with budget and adjust for each variance: £45,000 + £3,000 (sales volume, F) − £1,500 (sales price, A) − £2,000 (materials, A) + £500 (labour, F) = £45,000. The variances net to exactly zero, so actual profit equals budgeted profit — option A. This is a legitimate result, not a trick. Option B (£47,000) includes only the favourable variances. Option C (£46,000) nets the variances incorrectly as +£1,000. Option D (£44,000) nets the variances as −£1,000, reversing the signs of the favourable items.

Answer: D. Standard material cost for actual production = 500 × 4 × £6 = £12,000. Actual material cost = 2,200 × £6.50 = £14,300. Total material variance = £12,000 − £14,300 = −£2,300 adverse. This comprises: Price variance = (£6.00 − £6.50) × 2,200 = −£1,100 adverse. Usage variance = (2,000 − 2,200) × £6.00 = −£1,200 adverse. Total = −£1,100 − £1,200 = −£2,300 ✓. Option A is the price variance only. Option B is the usage variance only. Option C adds incorrectly.

Answer: A. Fixed overhead total variance = Absorbed overhead − Actual overhead. This is the difference between what was absorbed into production (standard OAR × actual output) and what was actually spent. If absorbed > actual = favourable (over-absorbed). If absorbed < actual = adverse (under-absorbed). Option B gives the expenditure variance only. Option C gives the volume variance (absorbed vs budgeted). Option D is the inverse of the total variance (reversed signs).

Answer: B. Variance investigation decisions involve cost-benefit analysis: large variances (material) are more worth investigating than small ones; the cost of investigation must be weighed against the likely savings from corrective action; and persistent variances (indicating a systematic problem) warrant more attention than one-off fluctuations. Both favourable and adverse variances may warrant investigation (A is wrong) — a favourable variance might indicate that standards are too loose. Some variances may be trivial and not worth investigating (C). Variances must be investigated promptly (D is wrong).

Answer: C. Material mix variance measures the effect of changing the proportions of materials used. Using more of the cheaper material (X) and less of the expensive material (Y) reduces the weighted average cost of the actual quantity used below the standard weighted average cost — this is favourable. The mix variance is not always adverse (A) — it depends on which material is substituted. Yield variance (B) measures output quantity, not mix. Option D incorrectly labels this as adverse.

Answer: C. Splitting into planning and operational variances isolates what managers can control. The planning variance (£8→£10) reflects an external market change — management cannot be held responsible for this. The operational variance (actual price vs £10 revised standard) measures how well purchasing performed against the updated benchmark. This produces fairer performance measurement. Options A, B and D misunderstand the purpose of variance analysis.

Answer: D. Calendar variance = (Actual days − Budgeted days) × Budgeted daily production × OAR = (20−22) × 500 × £4 = −2 × 500 × £4 = −£4,000 adverse. Fewer working days than planned means less production capacity — adverse volume variance due to calendar. This is a sub-variance of the fixed overhead volume variance, separating the effect of working days from efficiency. Option A incorrectly labels it favourable. Option B uses units rather than the variance. Option C uses incorrect numbers.