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Budgetary Control System Variances (Variances (Material Cost (adverse…
Budgetary Control System Variances
Variances
Material Cost
the difference between the actual cost of direct materials and the standard cost of quantity purchased of consumed
adverse varience
an overall hike in the market price of materials
purchase of materials of higher quality than standard
increase in bargaining power of suppliers
loss of purchase discounts due to smaller order sizes
inefficient buying by the procurement staff
indicates higher purchase costs incurred during the period compared with the standard
favourable variance
an overall decrease in the market price level
purchase of material of lower quality than the standard
better price negotiation by the procurement staff
implementation of better procurement practices
purchase discounts on larger order
suggests cost effective procurement by the company
Material Usage
the measure of difference between the actual quantity of material used during a period and the standard consumption of material for the level of output achieved
favourable variance
purchase of materials of a higher quality than the standard
greater use of skilled labour
training and development of workforce to improve productivity
use and improvement of automated manufacturing tools and processes
efficient utilisation of materials
adverse variance
purchase of materials of lower quality than the standard
use of unskilled labour
increase in material wastage due to depreciation of plant equipment
indicated higher consumption of material during the period as compared with the standard usage
Variances
Variable Overhead Efficiency
the difference between the actual and budgeted hours worked, which are applied to the standard variable overhead rate per hour
adverse varience
increase in utility costs, e.g. electricity, gas, water
more expensive indirect materials - change in supplier?
under budgeting
actual variable overhead is more than planned
favourable variance
cheaper utility costs, e.g. electricity, gas, water
cheaper indirect materials perhaps from a change in supplier
over budgeting
actual variable overhead is less than planned
Fixed Overhead Expenditure
the difference between the actual fixed overhead expense incurred and the budgeted fixed overhead expense
favourable variance
fixed overheads were less than anticipated
adverse variance
the actual fixed overhead expenses were greater than anticipated
unforeseen changes in
factory rent
equipment depreciation
salaries of production supervisors and support staff
insurance on production facilities
utilities
Variances
Labour Rate
the measure of difference between the actual cost of direct labour and the standard cost of direct labour utilised during a period
adverse variance
increase in the national minimum wage rate
hiring of more skilled labour than anticipated in the standard
inefficient hiring by the HR department
effective negotiations by labour unions
indicates higher labour costs incurred during a period compared with the standard
favourable variance
hiring of more un-skilled workers or sem-skilled labour
decrease in the overall wage rates in the market due to an increase in the supply of labour
inappropriataly high setting of the standard cost of direct labour which may be attributed to inaccurate planning
lower pay rises than anticipated
suggests cost effective employment of direct labour by the organisation
Labour Efficiency
the measure of difference between the standard cost of actual number of direct labour hours utilised during a period and the standard hours of direct labour for the level of output achieved
adverse variance
hiring of lower skilled labour than the standard
decrease in staff morale and motivation
idle time incurred during a period caused by disruption or stoppage of activities
poor quality materials that are harder to handle
suggests lower productivity of direct labour during a period compared with the standard
favourable variance
hiring of higher skilled labour
training of workforce in improved production techniques and methodologies
use of better quality raw materials which are easier to handle
indicates better productivity of direct labour during a period