What Is Variance Analysis - Assignment Example

Download file to see previous pages But it is of prime importance that management; especially the supervisors acquire full explanations of the reasons for these variances otherwise such variance analysis would be no good for control purposes. Variances are of two types, favourable and unfavourable. The favourable variance means that the budgeted and the actual costs and revenues are the same as forecasted by the budgeting department of the company, whereas unfavourable means the opposite of it.
In any manufacturing concern, the variable cost comprises of direct material, direct labour and variable production overhead cost. The responsibility of material price variance lies with the purchasing department. If the material price variance is unfavourable, then it should be an indication for the managers the prices of the raw materials have increased or the purchasing department has carelessly overstocked the inventory level during the current operational year. The adverse material price variance could also be due to change in material standard. The managers while analyzing the budgeted and actual profit should take care of the aforementioned factors. On the other hand, material usage variance usually occurs due to defective material and excessive waste of the material during the production. It has also been observed generally that material usage variance also occurs due to fault in an allocation of materials to jobs. The managers should ensure that materials of higher quality are used during the production process and allocation of materials to all the jobs is done prudently.
Another important direct cost is the direct labour cost. Labour rate variances tend to be fairly minor because usually the labour rates are agreed with the labour unions and there is a minor chance that these rates changes after the agreement is entered into. [Accountingtools.com. "What is variance analysis? ] Labor rate variance, however, may occur because of the use of a single average rate for a department, operations, or craft, while several different rates exist for the individual workers.    ...Download file to see next pagesRead More