Management accounting - Essay Example

A higher actual purchase cost is depicted by the adverse material price variance. The prices of raw materials may have increased in the overall market. Moreover, this may be due to inefficient buying by the company. The procurement staff may have ordered the materials in small quantities that did not attract any discount. The material usage variance also is unfavorable. The materials purchased may have been of a lower quality than the standard. In addition, the company may have employed unskilled labor.

The favorable labor rate variance affirms that the company may have employed un-skilled labor. In addition, the overall wage rates in the industry could have increased. Ultimately, it may have resulted due to poor planning by the management of Geeta. In contrast, the labor efficiency variance is unfavorable. It may be because of the company hiring un-skilled labor than the standard. Increased cost of services used may have made the variable overhead expenditure variance unfavorable. A rise in the statutory minimum wage rate may be a possible cause of the adverse variance.

The adverse variable overhead variance is a result of more time used in the manufacturing process than the standard time. In addition, it could have resulted due to use of cheaper materials, use of unskilled labor and decline in the efficiency of machines used. Variances are interrelated when one is unfavorable while the other is favorable. This is demonstrated in the labor variances. The favorable labor rate variance indicates that the company may have employed unskilled labor, which resulted in unfavorable labor efficiency variance.

Costing systems help a company to determine the relevant cost of a product. The traditional costing and activity based costing are the two common costing systems used. Activity based costing is a replacement to the traditional costing method. It divides production into major activities and then assigns costs to the activities based on the