The Variance Calculation in Budgeting - Paper Example

When budgeting, it is impossible that the actual budgeted figures will the equal to actual quantity. As a result, variances arise. It is vital for managers to evaluate the variances and their impact on the business at the end of each period.

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In this case study, the material and labor variances arises due to differences between actual and standard labor and material budget. Material variance include price variance, usage variance and cost variance. Price variance is a measure of differences between actual price of material and budgeted price of production raw material (Zimmerman, 2014). Usage variance measures the effectiveness at which management is utilizing raw material during production. It arises when the budgeted material quantity differs with the actual quantities utilized during that period. The material usage variance shows that managers have effectively controlled material quantities in the business.

A critical analysis of material price variance indicates that it is favorable. This implies the actual price was lower than budgeted price. It is a good indicator of management capability to estimate prices reasonably. If the actual price variance was higher than standard price variance (unfavorable) it could have indicated failure of management to control material cost during production. Overall, management has effectively controlled material cost.

As elucidated by Marie and Rao (2010), direct labor variance arises when actual labor cost differs from budgeted labor cost. When the variance is favorable (positive), it is an indicator that actual labor cost is lower than budgeted cost. Although the labor rate variance has a favorable variance, the efficiency and idle time variance are unfavorable. This is an indicator that management should investigate the human resource department. Since the direct labor variance indicator unfavorable variance, management must dedicate their time and effort trying to establish the reason why employees are not efficiently utilizing their time within the premise. When budgeted actual hours and standard hours differ significantly, managers must create a mechanism that will streamline the human resource department to ensure employees are more efficient. For instance, the company should consider implementing training session for production worker in order to improve their skills. This strategy will help the business to not only improve efficiency but also reduce the oval labor costs included during production. This will have a positive impact on the income statement because it will help the business to improve revenues in the long run.

The idle time variance is negative (unfavorable). This implies that the business paid more labor hours than actual hours worked. Drury (2013) noted that the amount of idle time variance is significant which means that employees are wasting more hours doing nothing than when working. This is a failure on the part of human resource manager and supervisors. Spine Line supervisors are not doing their job effectively. The main objective of supervisors is to ensure employees are using their time effectively. Moreover, supervisors must ensure employees are working at the right time in order to achieve the goals of the firm. Executive should question middle level managers why employees are spending more time doing nothing instead being productive. However, they should evaluate why employees are wasting time instead of being productive. It might be because they lack adequate skills or lack of motivation. If employees are not motivated to work, they might tend to spend most of their time doing unnecessarily things. Therefore, human resource department should investigate the cause of high idle time variance and labor efficiency variance.

The variance calculation are presented in the excel attached to this memo. It will help managers to understand how the analysis was conducted.

Yours sincerely

{Name}

References

Drury, C. M. (2013). Management and cost accounting. Springer.Marie, A., & Rao, A. (2010). Is standard costing still relevant? Evidence from Dubai. Management Accounting Quarterly, 11(2), 110.Zimmerman, J. L. (2014). Accounting for decision making and control (8th ed.). New York, NY: McGraw-Hill, pp. 538563.