Advanced Variance analysis involves the separation of indi¬ vidual cost variances into component parts. The benefit that may be derived from variance analysis depends on the interpretation and investigation of the component variances. A company has recently been carrying out a study on its use of variance analysis.

Requirement:

Explain, with the aid of simple numeric examples, for each ofthe following variance analysis exercises,

• their logic, purpose and limitation; and

• how the management accountant should go about investigating the component variances disclosed.

(a) The separation of the fixed overhead volume variance into capacity utilisation and effi¬ ciency components. (9 marks)

(b) The separation of the materials usage variance into materials mixture and materials yield components. (8 marks)

(c) The separation of the labour rate variance into planning and operational components.

(8 marks) (Total 25 marks)

CIMA Stage 3 Management Accounting Applications