An organization operates a standard costing system using the figures provided for the annual operating budget. The actual results are compared monthly.

The departmental managers have expressed concern about the system because the largest variances reported result from the following factors:

(a) direct material price variances due to the timing of price increases;

(b) direct material usage variance due to non-preventable waste of materials;

(c) direct labour rate variance due to under-estimating the hourly production labour rates.

They believe these items could be eliminated from the variance reports with an improved system. This would enable the smaller but more controllable variances to be highlighted.

The chief executive has asked you, as the management accountant, to review the situation, explain how the above variances occur and suggest how each of the problems might be overcome.