Question

CAT 1 AND 2

ATTEMPT ALL THE QUESTIONS

(1) Distinguish between ‘cost allocation’ and ‘cost apportionment’. Illustrate your answer with examples.

(2) Explain the possible causes of the labour rate and labour efficiency variances.

(3) Briefly explain the purpose of variance analysis.

Answer 1

Answer 1

The term allocation of cost is concerned with the complete cost items, whereas the apportionment of the cost is all about the proportion of cost items.

BASIS FOR COMPARISON	COST ALLOCATION	COST APPORTIONMENT
Meaning	Allocation of cost, implies the entire distribution of the overhead item to the departments on a logical basis.	Apportionment of cost refers to distribution of various overhead items, in proportion, to the department on a logical basis.
Represents	It represents that part of cost attribution, which charges a particular cost to a cost unit.	It represents that part of cost attribution, which shares cost among multiple cost units, in the proportion of expected benefit received.
Distribution	Directly assigned to the department.	Proportionately assigned to different departments.
Application	When the overhead belongs to a specific department.	When the overhead belongs to different departments.
Example	Salary paid to the employees of the maintenance department, can be allocated to that department.	Wages paid to the head of the factory, rent of factory, electricity, etc. cannot be charged to a particular department, then these can be apportioned amongst various departments.

ANSWER 2

Causes for Labour rate and Total Labour Efficiency Variance

1. Go slow tactics adopted by the trade union.

2. Defective and bad materials.

3. Lack of proper supervision.

4. Breakdown of plant and machinery.

5. Power failure.

6. Insufficient training and incorrect instructions.

7. Employment of efficient workers for full time and incentives given to them.

8. Loss in waiting time.

9. Increase in labour turnover.

10. Time lost due to delayed instructions.

11. Delay in receipt of raw materials.

12. Bad working conditions.

13. Change in the method of production.

14. Stress among the workers due to unsatisfactory personal relations.

15. Rigid system of inspection of materials.

16. Use of poor quality of raw materials requiring more time to complete work.

ANSWER 3

Purpose of variance analysis

variance analysis is a process of identifying causes of variation in the income and expenses of the current year from the budgeted values. It helps to understand why fluctuations happen and what can / should be done to reduce the adverse variance. This eventually helps in better budgeting activity.The basic purpose of variance analysis is determining the deviation from standard set by the organisation for production , sales , labour rate, labour time ,cost of sales , marketing cost etc.

Variance Analysis helps the managers in making efficient , detailed and forward looking budgetary decisions ,acts as a control mechanism , facilitates in assigning responsibility and accountability and engages control mechanism