(a) How does a system of standard costing enable a business to operate on the principle of management by exception?

(b) Some of the following materials and labour variances have been wrongly calculated, although the figures used are correct. Recalculate the variances, showing clearly the formulae you have used, and state whether the variances are adverse or favourable.

(i) Total Materials Variance (Standard price — Actual price) (Standard quantity — Actual quantity) = (£8.42 — £8.24) (1,940 litres — 2,270 litres) = (£0.18) (-330 litres) = £59.40 adverse (ii) Materials Price Variance (Standard price — Actual price) Standard quantity = (£8.42 — £8.24) 1,940 = £349.20 favourable (iii) Materials Usage Variance (Standard quantity — Actual quantity) Standard price = (1,940 — 2,270) £8.42 = £2,778.6 adverse (iv) Total Labour Variance (Actual hours — Standard hours) (Actual rate — Standard rate) = (860 — 800) (£6.14 — £6.53) = (60 hours) (-£0.39) = £23.4 adverse (v) Wage Rate Variance (Standard rate — Actual rate) Actual hours = (£6.53 — £6.14) 860 = £335.4 favourable (vi) Labour Efficiency Variance (Actual hours — Standard hours) Standard rate = (860 — 800) £6.53 = £391.80 favourable (Edexcel: GCE A-level)