Question

Describe who is responsible for the cost and efficiency variances for direct materials, direct labor, and manufacturing overhead?

Answer 1

1. Direct Material Cost Variance

Materials price variance is the result of deviation of actual price paid for materials from what has been set as standard. Therefore, Purchasing department is responsible to place orders for direct materials so this variance is generally considered the responsibility of purchase manager.

2. Direct Material Usage(Quality) Variance

Materials quantity variance is computed by comparing the actual quantity of materials used with the standard quantity of material allowed, both priced at standard costt. Generally, production department is responsible to see that material usage is kept in line with standards. However, purchasing department may be responsible for unfavorable materials quantity variance if it is caused by poor quality of materials. If purchasing department obtains inferior quality materials in effort to economize on price, the materials may be unsuitable for use and may result in excessive waste. Thus purchasing department rather than production department would be responsible for the quantity or usage variance.

3. Direct Labour Cost Variance

The price(cost) variance for direct labor is commonly termed as labor rate variance. This variance measures any deviation from standard in the average hourly rate paid to direct labor workers. Since rate variances generally arise as a result of how labor is used, production supervisors bear responsibility for seeing that labor price variances are kept under control.

4. Direct Labour Efficiency (Usage) Variance

Labor efficiency variance is calculated by comparing the actual hours worked with standard hours allowed, both at the standard labor rate. The manager in charge of production is generally considered responsible for labor efficiency variance. However, purchase manager could be held responsible if the acquisition of poor materials resulted in excessive labor processing time.

Note: It is very difficult to make responsible any department or person for Manufacturing cost or efficiency variance because manufacturing overhead cost is not the single cost, it involves various other cost like indirect material, indirect labour, and indirect expenses e.g. elctricity, power, fuel etc. As far as indirect labour and indirect material concern involved in manufacturing overhead, the department responsible for the respective variance is same as covered in earlier variances of direct material and direct Labour.

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