Problem:

Fancy Foods Ltd uses a standard costing system to control its material and labour costs. The standard costs for January 2007 were as follows.

Standard Costs
Materials     0.5 kg per unit £10 per kg    £5
Labour        1 hour at £8 per hour           £8

They were expecting to produce 200 units in January 2007, whereas they actually produced 210 units. The actual costs incurred were

Actual Costs

Materials     110 kgs at a total cost of £1045
Labour        220 hours at a total cost of £1815

a) Determine the total material variance and its two sub variances, the material price variance and the material usage variance.

b) Give two possible reasons for the causes of the material price variance and two possible reasons for the usage variance that you have calculated in part above.

c) Determine the total labour variance and its two sub variances, the labour rate variance and the labour efficiency variance.

d) Give two possible reasons for the causes of the labour rate variance and two possible reasons for the causes of the efficiency variances that you have calculated in part (c) above.

e) Describe how the causes of labour variances and the material variances may be linked.