Final answer:
Total variable cost variance can be analyzed by looking at price and efficiency variances. These provide an understanding of the discrepancies in actual versus expected input prices and quantities. Knowledge of average total cost, average variable cost, and marginal cost is crucial for effective cost management.
Step-by-step explanation:
The question pertains to the analysis of total variable cost variance, which can indeed be broken down into separate variances to evaluate specific aspects of cost management. The correct answer to the question is A. Price and efficiency. These two variances help in understanding the different reasons why actual results may differ from budgeted or standard costs. Price variance measures the difference between the actual price paid for the input and the standard price that was expected to be paid. On the other hand, efficiency variance measures the difference between the actual quantity of input used and the amount that should have been used according to the standard amount for the actual output.
Average total cost is calculated by dividing total costs (fixed plus variable) by the total output. Average variable cost is obtained by dividing variable cost by the total output at each level of output, which is typically U-shaped on a graph. Last, marginal cost refers to the additional cost of producing one more unit of output. These costs are analyzed on a per-unit basis and give insight into cost management and pricing strategies a firm may undertake.
Understanding how variable costs, which include labor and raw materials, change with output levels is key for businesses to manage their expenses effectively and to ensure profitability by keeping the average variable cost below the market price.