disparities that can arise when a business is budgeting for its projects. It will look at how the expected results can vary to the actual outcomes at the end of the project or product due to various arising factors during the production. In this case our main focus will mainly focus on the cost variance, the various variances resulting from cost variances, the standards or benchmarks of these variance as well as future forecasts that can help eliminate budget inaccuracy. Variances can be computed for both costs and revenue. Variances can be divided according to their effect or nature of the underlying amounts.
Cost variance (CV) refers to the amount of money that has been spent on a project in comparison to the amount of money spent on the work accomplished. In other words in cost variance, the concern is; has the work been successfully completed in respect to the amount of money that was budgeted for and the accomplishment that has been achieved. I.e. Cost Variance (CV) = Budgeted Cost of Work Performed (BCWP) - Actual Cost of Work performed (ACWP).
There are various expense results with budget expectations, and that arises due to various reasons. There is the labor efficiency variance which arises when there is a difference between the labor hours's set to be worked for in relation to the actual number of units produced and the actual number of hours worked when the labor hours are valued at the standard rate. (Weetman, Pauline, 2006)
The manager in charge of production and the purchase manager are generally considered answerable for labor efficiency variance. The purchase manager is answerable if the acquisition of poor materials results in excessive labor processing time. Possible causes ensuing to unfavorable labor efficiency variance include poor quality materials, poorly trained workers, faulty equipments that slow or make working impossible, and poor supervision. Unfavorable labor efficiency could also be as a result of insufficient demand for company's products, if customers are not ordering in sufficient, then the workers are slowed down or rendered inactive.
In my view I recommend the benchmarks for labor efficiency variance to include wages earned, it should also include fringe benefits and other labor costs, for instance allowances given for extra hours worked in a company or breaks, personal needs of employees, clean up and machine downtime. To improve budgetary accuracy in future, and so to avoid unfavorable labor efficiency, the business should focus on obtaining favorable materials, getting trained or skilled workers and supervisors and ensuring that equipments are good working conditions or acquiring others to replace the old ones. 'The business should aim at reducing any labor costs arising at the process of production especially those that are foreseen like it is very evident that faulty equipments will increase the labor cost'. (Hansen et al., 2008)
Another variance is the sales volumes variance which is the difference between actual sales and what was expected, multiplied by the budgeted price per unit. An unfavorable variance means that the business sold lower units than the budgeted numbers sold. Sales and Marketing Managers should be on the look out the company's product market share, features, price points, expected marketing activities, distribution channels, and sales in new region and how they will impact future sales. 'If a product is selling at a lower price than the budgeted amount, the resultant results may be stimulation of sales to and creating favorable sales volume variance but then again resulting to unfavorable selling price variance'. (Colin, 2007)
Causes of sales volume variance include cannibalization where the company releases another product that competes with the product in question or if the competitors release new products that are more attractive to customers. The price may also be a cause if the company makes changes on the product price, which in turn impels a change in unit sales volume. It also may result due to trade restrictions and barriers. I would recommend the following benchmarks for measuring sales volumes variance,
Material variance on the other hand is another variance that results on cost variance in relation to material expenditure. It is the difference that accrues from the difference that arises from actual purchase price of the materials and standard purchase price of materials in the market. It is either calculated at the time of purchase of the materials or at the time when the materials are used. Barrons, (2000) argues that 'if it is calculated during purchase of materials, it is called direct materials purchase price variance but if is calculated at the time of usage it is known as direct materials price usage variance.' The purchase manager is responsible for material variance but the price paid for the goods is factored by, the number of units ordered in a lot, how the order is delivered, and the quantity of materials purchased. A deviation from any of these factors from what was assumed when the standards were set can result in material price variance. For instance, if a business purchased second grade materials rather than top-grade materials can be a reason enough for material price to occur. Material variance like other variance takes place on a monthly basis.
The benchmark or the standards for this type of variance are the price of materials in the market, which means that if the company had budgeted for a certain figure but in the market the material are being sold at a different price could set a sure standard for market variance. Besides that the origin of the materials also acts a yardstick, the longer the distance, means added cost of transportation to the actual cost of material, it could also be set on the basis of the availability of the materials, whereby some materials are available at a particular season and lack in others. To avoid budget future problems, the business should work at ensuring it buys in wholesales especially if the distance is long for collecting the materials is huge.
Variance of efficiency: These include variances due to inefficiency or efficiency in the use of the material or labor ascertained by the comparing actual quantities of material and labor hours and from special allowances for surplus material and labor cost. We can therefore ascertain that it results from material inefficiency condition and also labor inefficiency. In other words, this variance is wide touching on every area of the company where there is inefficiency. The causes of this variance is as result of inefficiency in various departments or among individuals in exercising their duties, or the inefficiency resulting from the skills offered to what was expected among the employees or in the department.
The yardsticks/benchmarks that should be used to gauge this type of variance are the nature of output achieved at the end of the whole process or at the end of the production. So the question, that should arise here is, what was the final output, if it is less than what was expected then this means variance of inefficiency has been arrived at and if the final output is greater than even what was expected this means a variance of efficiency has been obtained. I justify my proposed benchmarks of measuring this variance by noting that all that a company is expected to do in this case is to improve on its efficiency so the final output can meet the expected output which demonstrates the efficiency of the whole process of production. To improve on future budget forecasts the company should ensure efficiency especially on its labor and material acquisition.
Overhead variance also known as burden variance conversely means that overhead was either over applied or under applied. In the situation whereby the application of the predetermined rate went over the actual overhead used, this means an over application. If the predetermined rate fell short…