To which my first thought is “Why are you telling me this? I know you can calculate variances”.
In this exam you will be asked to calculate variances in another task. These tasks are automatically marked by the exam software.
So why would AAT pay real human markers (which are expensive) just to test you again to see if you can calculate variances?
The answer is that they are not!
Whilst in the written questions on variances you will need to calculate variances, the actual variances are not what the marker is looking for.
The marker is looking for you to suggest what have caused the variance, and what effect this will have on the business.
So for example you calculate the labour rate variance was adverse, you need to suggest a possible cause for this. Sometimes the scenario will give you a cause, sometimes it won’t. If it doesn’t you need to suggest something which is possible. You don’t need any proof to back it up, it just needs to be sensible.
Looking at our adverse labour rate variance scenario, you need to know what this variance shows. This shows the difference in cost per hour. This is why you shouldn’t learn how to calculate variances by rote, without knowing what they are actually showing. Know what the variances shows will help you greatly in answering the written questions.
So if the labour rate variance is adverse, you don’t want to say that you employed cheaper labour as this is clearly is wrong, as this would cause a favourable variance. An answer could be that you have had to pay overtime. You need to assume the marker doesn’t know that overtime is paid at a premium, so state it, whilst it is obvious to you, it would get you marks. It could also be that you have employed higher quality staff, which are paid at a higher rate. You don’t need to know this for certain, it just needs to be sensible, possible cause for an adverse labour rate.
If you are looking for top marks, you should try to link this it another variance. If you employ higher quality staff, you would expect them to work faster, so is the labour efficiency variance favourable?
However, you need to look at the bigger picture, what is the overall net effect? If the labour efficiency variance is favourable but the adverse labour rate variance is much greater, the overall profit will be down, and the changes might not have not been worthwhile.
Finally, don’t just assume that if the overall costs are up, that profit is down. If a business uses better labour or better materials, does this mean that the quality of the product is better, and does this mean that the sales price could be higher, so the extra costs are offset?