Question

1. Why are product cost variances (DM, DL, MOH) broken down and separated into price & quantity variance or rate & efficiency variance. What is the purpose and what information do these additional variances provide? Explain

Answer 1

The cost variance formula is usually comprised of two elements, which are:

Volume variance.
This is the difference in the actual versus expected unit volume of whatever is being measured, multiplied by the standard price per unit.

Price Variance.
This is the difference between the actual versus the expected price of whatever is being measured, multiplied by the standard number of units.

Material price variance specifies the price difference of quantity brought.this helps is understand how much we thought per unit price would be and how much it actually is.

Volume variance specifies the quantity of material we estimated that we required and quantity we actually used.if it is unfavorable that means the quantity of stock we are purchasing might be defective this requiring more material than estimated.

Labour variance
This variance helps us understand why per unit labour rate is more than what we expected and
Why number of labour hours required are more than what we expected.

The same can be understood for the variable over head variances

Fixed overhead variance

Expenditure is the concerned with the difference between budgeted and actual fixed overheads
While volume variance will look into why if any more oh are required to be absorbed than the budgeted amount

Basically the variances are subdivided into reasons to understand difference on price and difference in volume(quantity).