Management accounting - Essay Example

Material L10 had a favorable usage variance because the materials used were of higher quality than standard, more effective use of material or there were errors in allocating material to jobs. On the other hand, material L17 had an adverse usage variance because of using defective material, excessive waste, or stricter quality control. The labour rate recorded a favorable variance due to use of workers at a rate of pay that was lower than the standard. Labour efficiency variance was adverse because maybe there was lost time in excess of standard allowed or output was lower than standard set due to lack of training and sub-standard materials.

The adverse variable overhead expenditure could have been caused by increase in cost of services or excessive use of services. Variable overhead volume variance was adverse due to the production or the level of activity, labour hours, being less than the budgeted. On the other hand, the adverse fixed overhead expenditure could be caused by the same factors that led to an adverse variable overhead expenditure. This is because of the fact that both fixed and variable overheads were being allocated using the same basis, labour hours.

In addition, the production or the level of activity being less than the budgeted can explain the adverse fixed overhead capacity. ABC involves identification of elements, causing the costs of a business’s major activities (Clinton, 2004). Overheads incurred are charged to units based on their cost drivers causing the overheads. The ideas behind ABC are: Both traditional absorption costing and activity base costing systems adopt the two-stage allocation process. However, in allocation of overheads ABC establishes separate pools for support activities such as dispatching (Gunther, 2005).

As costs of activities are assigned directly to products through cost driver rates, reapportionment of services department costs is