Question

A recent review of actual operating results compared to budget indicates an unfavorable cost variance on both direct materials and direct labor (that is, we are spending more on materials and labor than we expected to). Which departments may be responsible for additional costs? For example, can we blame Human Resources for hiring inexperienced factory workers who have been making many mistakes causing us to waste materials?

Answer 1

The budget of an organization is usually not prepared by one department or by one person in a company, The budget is prepared based on the past analysis and subjected to present market conditions and inflations and availability.

• The Budget starts from the top management levels i.e., from the executive managers, the board of directors and the accounting team
• The budget preparation is only an estimate and what is to be done, but actually due to the other departments are also involved in it which means they are the main who need to execute and implement the planned budget.

The following are the responsible factors and departments for such variances:

1. Initial planning if the budget planned is only a mistake or not calculated with the changes in market price and inflation and actual requirement of an organization it is the Top level management and accounting team
2. Recruiting experienced and skilled managers and workers are also major factors for a healthy implementation of the budget if there is no proper supervision and control and monitoring of budget from time-to-time it leads to unfavorable issues.
3. The procurement department is the reason for the material price variances and HR department for labor rate variances as these are the department who procure and recruit the labor and staff for salaries and price in case of materials
4. The vendor relation is also a factor which helps to know where is the correct price for a material, and it is linked with the procurement department
5. The usage variance of material and labor is due to the poor skills and experience, of a worker and also a composition of the team also makes the difference
6. The training department is also responsible as any new worker is trained in a training department for a period in all organizations nowadays
7. The production department is also a major area for the unfavorable variances, the proper maintenance of machines and tools also contributed analysis to usage.
8. Proper monitoring and maintaining low idle time and efficient usage of materials reduces the unfavorable variances

Hence the Procurement, Top level management, Human resource, and Production are the major departments responsible for such unfavorable variances in material and labor.