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Causes of Variances

Causes of Variances

In order that variance analysis is of any use, it is essential to precisely determine causes of variances so that management may initiate action to rectify an unfavorable variance.

Reason for Material Price Variance

Following are the possible causes of this variance:

  • Change in market price
  • Change in delivery cost
  • Emergency purchases which may be due to upsets in production program, slackness of store keepers, non-availability or funs etc.
  • Inefficient buying
  • Untimely buying
  • Non-availability of standard quality of material
  • Loss of previously available purchase discounts
  • Improper dispatch instructions
  • Change in taxes and duties
  • Use of substitute material of different prices

Reason for Material Usage Variance

Following are the possible causes of this variance:

  • Careless handling of materials by employees
  • Use of poor quality material
  • Poor maintenance and defects in machinery
  • Change in production design and production methods
  • Abnormal wastage
  • Pilferage of material due to inadequate inspection
  • Wrong mixture of materials
  • Improper engineering specifications

Reason for Labor Rate Variance

Following are the possible causes of this variance:

  • Change in basic wage rate
  • Paying higher wages in seasonal and emergency operations
  • Paying overtime for urgent work
  • Application of different wage payment systems
  • Revision of wages due to an award or litigation or agreement with trade unions
  • Appointing unskilled workers

Reason for Labor Efficiency Variance

Following are the possible causes of this variance:

  • Appointing low grade workers
  • Inadequate training to employees
  • Incorrect Instructions
  • Us e of sub –standard material requiring rework.
  • Use of defective machinery and equipment
  • Incompetent supervision
  • Poor working conditions
  • Poor scheduling of production processes
  • Strained personnel relations and worker’s dissatisfaction
  • Increase in labor turnover

Reason for Overhead Expenditure Variance

Following are the possible causes of this variance:

  • Change in price of indirect material and labor
  • Non-availability of specified services
  • Change in efficiency in use of services
  • Over or under utilization of services
  • Change in production methods
  • Improper use of available facilities
  • Ineffective control in spending
  • Increase in cost of some external services
  • Seasonal conditions
  • Improperly set standards

Reason for Overhead Volume Variance

Following are the possible causes of this variance:

  • Over or under sales demand
  • Change in total capacity in number of men employed, number of shifts or machines used
  • Loss of working hours due to inefficient planning
  • Change in efficiency of labors and machines
  • Working days being more or less than budgeted

 

 

Reason for Overhead Efficiency Variance

Following are the possible causes of this variance:

  • Poor working conditions
  • Inefficiency of labor
  • Poor supervision
  • Poor scheduling of production processes
  • Use of inferior material and defective tools
  • Improperly set standards

 

Departments responsible for variance

Name of Variance                                                                                      Name of Department

Material Price Variance                                                                       Purchase Department

Material usage variance                                                                     Production Department/Factory Foreman

Labor rate Variance                                                                                Personnel Department

Labor efficiency variance                                                                    Production Department/Factory Foreman

Overhead variances                                                                               Production Department/Factory Foreman

For additional reading visit - http://accounting-simplified.com/management/variance-analysis/

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