All subjects · Accounting · WAC12 Corporate and Management Accounting

Reasons for variances, interrelationships and management by exception

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

Calculating variances is only half the job. Examiners reward explaining why they arose, how one variance can cause another, and which ones deserve management's attention.

Practise this in the app: instant marking and a fix for every mistake. Free, no email needed to start.

Practise this lesson

Possible reasons

Variance	Favourable reasons	Adverse reasons
Material price	Bulk discounts, cheaper supplier, lower quality material, market price fall	Supplier price rises, higher quality material, loss of discounts, rush orders, exchange rate changes
Material usage	Better quality material, skilled workers, new machinery, less waste	Poor quality material, inexperienced staff, machine faults, theft, poor storage
Labour rate	Lower-paid or less skilled staff used, less overtime	Pay rise, overtime or bonus payments, more skilled (dearer) staff
Labour efficiency	Skilled or motivated workers, better machines, good material	Untrained staff, poor material, machine breakdowns, idle time, low morale
Variable overhead	Lower power prices, efficient use of machines	Higher energy prices, more hours worked
Fixed overhead	Spending below budget, output above budget	Spending above budget (rent rise), output below budget

Interrelationships

Variances are often linked, so a 'good' variance in one department may cause a 'bad' one elsewhere:

Cheaper, poorer material: material price F, but usage A (more waste) and labour efficiency A (slower working).
More skilled, dearer workers: labour rate A, but efficiency F and material usage F.
Overtime to meet a rush order: labour rate A, and fixed overhead may be F (higher output absorbs more).

So do not judge a manager on one variance alone; look at the whole picture and the reasons.

Management by exception

Managers have limited time, so they investigate only significant variances: for example, those over a set percentage (say 5%) of standard cost or over a money limit. Small variances are accepted as normal.

Advantages: saves management time, focuses attention where action is needed.

Disadvantages: small adverse variances that persist may be ignored; favourable variances also deserve investigation (they may show standards are too easy, or quality has been cut).

When asked whether to take action, examiners expect points for and against, reference to management by exception, and a conclusion.

Worked example

A purchasing manager reports a material price variance of £3,000 favourable after switching suppliers. The production manager reports material usage £4,200 adverse and labour efficiency £1,800 adverse. Comment.

The cheaper material is probably lower quality, causing more waste and slower working
Net effect = 3,000 - 4,200 - 1,800 = (£3,000)
The switch has cost the company overall; return to the original supplier unless quality can be improved

Answer: Overall the change is £3,000 adverse: the variances are interrelated

Key idea: Explain variances with specific causes; recognise interrelationships (cheap material: price F, usage and efficiency A); use management by exception to investigate significant variances only.

Check yourself

A company buys cheaper, lower-grade material. Which pattern of variances is most likely?
- Material price adverse, material usage favourable
- Material price favourable, material usage adverse
- Labour rate adverse, labour efficiency favourable
- All variances favourable
Show answer
Material price favourable, material usage adverse. Lower price saves money per kg but more is wasted.
Highly skilled workers on higher pay are used instead of trainees. Which pattern is most likely?
- Labour rate favourable, labour efficiency adverse
- Material price adverse
- Fixed overhead adverse
- Labour rate adverse, labour efficiency favourable
Show answer
Labour rate adverse, labour efficiency favourable. They cost more per hour but work faster and waste less.
What is management by exception?
- Investigating every variance however small
- Investigating only variances that are significant
- Ignoring all favourable variances
- Setting standards without managers' involvement
Show answer
Investigating only variances that are significant. Attention is focused on significant deviations.
The standard material cost is £56,000 and the material variance is £3,360 adverse. The company investigates variances above 5% of standard. What is the variance as a percentage of standard?
Show answer
6.0 %. 3,360 / 56,000 x 100 = 6.0%, so it is investigated.
Why should a large favourable variance also be investigated?
- The standard may be too easy, or quality may have been cut
- Favourable variances are always errors
- It must be paid to the shareholders
- It increases the tax charge
Show answer
The standard may be too easy, or quality may have been cut. Favourable variances may reveal slack standards or hidden problems.
Give two possible reasons for an adverse labour rate variance.
Show answer
A pay rise was agreed after the standard was set, and overtime was paid at a premium rate to meet extra orders; more skilled, higher-paid workers may also have been used.. Labour rate variances come from the price of labour: pay rises, overtime premiums, bonuses or using a higher grade of worker.

Practise with instant feedback

Sources

Last updated 8 November 2026. Spotted a mistake? Tell us.