Types and Causes of Cost Variances

Actual labor and material costs may vary significantly from their estimates. An organization needs to understand some of the factors that may cause such variances. The possible causes of the above variances can be analyzed as follows:

Causes of Labour Variances

1) Labour Rate Variances – the favorable variance could be due to:

  • Lower rates being paid to employees than planned due wage cuts or decreases
  • Lower grades of workers being used than planned
  • Reduced payment of bonuses and overtime than had been planned

2) Labor Efficiency Variances – the unfavorable Variance may be due to:

  • Lower grade of employees used, e.g. untrained personnel
  • Poor organization or supervision
  • Machine problems encountered
  • Use of poor quality labour
  • Decreased labour efficiency

Causes of Material Variances

1) Material Price Variance – Causes of the favorable variance could be:

  • Paying lower prices than planned
  • Gaining quantity discounts by buying in larger quantities than planned
  • Buying lower quality than planned
  • Buying substitutes due to inaccessibility of the planned materials

2) Material Quantity variance – The unfavorable variance could be due to:

  • Lower quality than planned
  • Losses due to use of substitute materials
  • Poorly trained workers

The main purpose of undertaking variance analysis is to give a signal of those areas within the organization which exhibit problems and thus require managerial attention (RDI online learning materials, 2012). The variances give a lead way into the investigation of such problems from whence appropriate course of action is determined, recommended and implemented.

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