Management Accounting · Monitoring performance and reporting

Causes and Interrelationships of Variances in ACCA Management Accounting

Updated 11 October 2026 · Fact-checked

Variances are caused by poor standards, poor control, or changes in the environment. Many are linked: a cheaper material may give a favourable price variance but an adverse usage or efficiency variance. To answer, name the likely cause, check related variances, then investigate only if the size, trend and controllability justify the cost.

Understand Causes and Interrelationships of Variances

A variance is the difference between a standard (or budget) figure and the actual figure. Calculating it is only the first step. Management wants to know why it happened and whether to act.

Causes fall into three groups. Planning errors: the standard was unrealistic or out of date. Operational (control) failures: waste, poor supervision, machine breakdowns, unskilled labour. External changes: supplier price rises, exchange rate moves, wage settlements. Only the second group is usually controllable by the manager being judged.

Variances are often interrelated. One decision can improve one variance and worsen another. Buying cheaper, lower-quality material gives a favourable material price variance, but more waste (adverse usage) and perhaps more labour time (adverse efficiency). Using more skilled, higher-paid workers gives an adverse labour rate variance but may give a favourable efficiency variance and favourable material usage.

The same idea links sales and production. A price cut may give an adverse sales price variance but a favourable sales volume variance. Overtime paid to meet a deadline gives an adverse rate variance but may remove an adverse idle time or volume problem.

Not every variance is worth investigating. Investigation costs time and money. Managers look at the size of the variance, whether it is controllable, whether it is a one-off or a trend, and whether the benefit of correcting it exceeds the cost of investigating.

Key formulas to remember

Variance sign: Favourable (F) = profit higher than standard; Adverse (A) = profit lower than standard; Always state F or A. A bigger cost than flexed standard is adverse; higher revenue than standard is favourable.
Variance as a percentage: Variance % = Variance ÷ Standard (or flexed budget) cost × 100; Used to judge significance against a set threshold, for example a fixed percentage or dollar amount set by the business.
Investigation rule of thumb: Investigate if expected benefit of correction > cost of investigation; Also consider controllability and trend. This is a guide, not a fixed rule.
Common interrelationships: Price (F) ↔ Usage/Quality (A); Rate (A) ↔ Efficiency (F); Sales price (A) ↔ Sales volume (F); These are typical links, not guaranteed. Check the scenario facts before claiming a link.

How to solve Causes and Interrelationships of Variances questions

Use this method for any question asking for causes, links or investigation decisions.

1Identify each variance and mark it F or A, with its size.
2Read the scenario for clues: new supplier, new staff, machine issues, price changes, exchange rates, quality changes.
3Suggest a cause that fits the clue and the variance type (price, usage, rate, efficiency, volume).
4Look for a linked variance that moves the opposite way, and explain the trade-off in one sentence.
5Decide whether the cause is controllable and who is responsible.
6Judge whether to investigate: consider size, trend, controllability and cost of investigating.
7Give a clear conclusion in the form the question asks for (select the option or enter the figure).

Quickest way: Pair and test

When to use it: For multiple choice or multiple response questions that link a cause to a variance or two variances together.

Underline the variance type and its direction.
Ask: does the cause change price, quantity or time?
Match price causes to price variances, quantity causes to usage, time causes to efficiency or idle time.
Eliminate options where the direction is wrong, for example a cheaper material causing an adverse price variance.
If two variances are named, pick the pair that pulls opposite ways for the same decision.

Common mistakes in Causes and Interrelationships of Variances

Giving a cause that matches the wrong variance, such as poor labour skill for a material price variance.
Students recall a list of causes without checking whether it affects price, quantity or time.
Fix: Decide first if the variance is about price, quantity or time. Then choose a cause from that area.
Assuming a favourable variance is always good news.
The label sounds positive.
Fix: Ask how it was achieved. A favourable price from poor-quality material may cause adverse usage and unhappy customers.
Treating every adverse variance as the manager's fault.
Students ignore controllability.
Fix: Separate external causes, such as a market price rise, from internal ones. Note a bad standard as a planning error.
Linking variances without checking the scenario.
Students memorise pairs as if they always apply.
Fix: Only claim a link if the facts support it. State it as a likely or possible link.
Saying to investigate every variance, or none.
Students forget that investigation has a cost.
Fix: Weigh the size, trend and controllability against cost. Small, random variances are usually left alone.
Mixing up sales price and sales volume effects of a price cut.
Both variances come from the same decision.
Fix: A lower price gives an adverse sales price variance and may raise volume, giving a favourable volume variance.

Worked examples

Example 1

A company switches to a cheaper supplier of material. The material price variance is $4,000 favourable. The material usage variance is $6,500 adverse and the labour efficiency variance is $2,000 adverse. Explain the likely link and whether the switch was beneficial.

Show the solution

Price variance is favourable: the cheaper supplier cut the cost per unit.
Usage variance is adverse: the lower-quality material probably caused more waste or scrap.
Labour efficiency is adverse: extra handling, rework or machine problems may have used more labour hours.
Net effect on the two material variances: $4,000 F − $6,500 A = $2,500 A.
Adding the labour efficiency variance: $2,500 A + $2,000 A = $4,500 A.

Answer: The variances are probably linked: the price saving was outweighed by extra waste and labour time. The switch cost $4,500 more than standard on these three variances, so it was not beneficial on cost alone.

Example 2

Last month the labour rate variance was $1,200 adverse and the labour efficiency variance was $3,000 favourable. Management had used more experienced staff than the standard assumed. Is this interrelationship plausible and should management investigate?

Show the solution

More experienced staff are usually paid more than the standard rate, so an adverse rate variance is expected.
Experienced staff usually work faster, so a favourable efficiency variance is plausible.
Net effect: $3,000 F − $1,200 A = $1,800 F.
The variances are explained by one known decision, so the cause is already understood.
Investigation would add cost and little new information. Management should instead consider whether to update the standard or keep the staff mix.

Answer: The link is plausible and the net effect is $1,800 favourable. The cause is known, so detailed investigation is not needed. Management should review the standard if the mix will continue.

Exam tips

In objective questions, check the direction (F or A) before the cause. Many wrong options have the right cause but the wrong direction.
Read the scenario for a single decision, such as a new supplier or a price cut. It usually points to the linked variances.
Use cautious words such as possible or likely in written-style answers. The exam expects reasonable causes, not certainties.
For investigation questions, think of size, trend, controllability and cost. These four points cover most correct answers.
In multiple response questions, select exactly the stated number. Do not choose an option only because it sounds plausible; match it to the variance type.

Practice questions from Monitoring performance and reporting

Causes and Interrelationships of Variances: frequently asked questions

What are the reasons for an adverse material price variance?

Common reasons are a general market price rise, loss of bulk discounts, buying in smaller lots, using a more expensive supplier, urgent orders, higher quality material, or an unrealistic standard. Currency movements can also be a cause when materials are imported.

What is an example of interrelated variances?

Buying cheaper material gives a favourable price variance but may cause adverse usage and labour efficiency variances. Another example is paying higher wages for skilled staff: an adverse rate variance but a possibly favourable efficiency variance.

How do I decide whether to investigate a variance?

Look at the size, whether it is a one-off or a trend, whether it is controllable, and whether the benefit of fixing it is greater than the cost of investigating. Many firms also set a threshold, such as a percentage of standard cost.

Should I investigate favourable variances too?

Yes, if they are significant. A favourable variance may reveal a better method worth repeating, or a hidden problem such as quality loss. It may also show the standard was set too loosely.