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 be blame Human Resources for hiring inexperienced factory workers who have been making many mistakes causing us to waste materials?

Answer 1

Solution:-

1. Unfavorable Direct materials Cost variance:-

a. Direct material price variance

Purchasing department is responsible to place orders for direct materials so this variance is generally considered the responsibility of purchase manager. However, the above reasons clarify that the materials price variance may or may not be the result of inefficiencies of the purchasing department.

b. Direct material usage variance:-

This is the difference between the standard and actual number of units used in the production process, multiplied by the standard cost per unit. This variance is the responsibility of the production department.

The occurrence of variances is very normal. They occur for almost all cost elements and should not be used to find someone to blame. Sometimes they may not be very significant and sometimes they may be the result of the factors that are beyond the control of managers. Variances are tools to control costs, improve efficiency and should be used positively.

1. Unfavorable Direct Labor Cost variance:-

a. Unfavorable labor rate variance:-

Usually, labor rate variance does not occur due to change in labor rates because they are normally predictable. The common reason of an unfavorable labor rate variance is inappropriate use of labor by production supervisors.

All tasks do not require equally skilled workers. Some tasks are more complicated and require more experienced workers than others. It should be kept in mind when tasks are assigned to workers. If the tasks that are not so complicated are assigned to very experienced workers, unfavorable labor rate variance may be the result. Because highly experienced workers are paid high wages. On the other hand, if poorly trained workers are assigned tasks that require high level of expertise, favorable labor rate variance may be the result. Because such workers are usually paid low wages. But inexperienced workers may not be as efficient.

b. Causes of unfavorable direct labor efficiency variance:-

There are a lot of reasons of unfavorable direct labor efficiency variance. Some common reasons are as follows:

1. Inexperienced workers
2. Poorly motivated workers
3. Old or faulty equipment
4. Purchase of low quality or unsuitable direct materials
5. Poor supervision
6. Insufficient demand for company’s product
7. Frequent breakdowns
8. Shortage of raw materials
9. Just in time manufacturing system