RESPONSIBILITY FOR VARIANCES

Management scrutinizes variances in order to know the causes of variances and enable the
management to make corrective actions and fairly reward good performance. Accordingly, the
emphasis of tracing the responsibility for such variances to a particular person or department is not to
determine who is at fault and render the appropriate sanction, but rather to use the knowledge about
the variances to promote learning and continuous improvement in production operations.

The different variances for each production cost input, the causes of such variance and the
person (department) responsible for such variances are presented below.

A. Direct Materials Variance

1. Price variance maybe attributable to the quality of materials purchased or effort exerted in
purchasing. Thus, it is the responsibility of purchasing manager. Factors that influence the price
paid for materials purchased include volume of materials ordered, how the order is delivered,
whether the order is a rush order, and quality of materials. Price variance results from deviation
of any of these factors from what was assumed when standards were set.

2. Quantity variance is attributable to the efficiency of production process. Thus, it is the

responsibility of the production manager. Variance maybe attributable to:
 a. Materials quality – high quality materials usually lead to favorable variance
b. Skills of laborers – highly skilled laborers usually lead to favorable variance
c. Production facilities – systematic and efficient production process and quality equipments
usually lead to favorable variance.
d. Supervision – poor supervision of direct laborers lead to unfavorable variance.
e. Warehouse facilities – proper warehouse facilities usually sustain the quality of materials and
lead to favorable variance
f. Security facilities - Pilferage cases will result to unseen increase in materials consumption,
therefore leading to unfavorable variance.

B. Direct Labor Variance

1. Labor Rate variance - variance result from actually paying more or less than the standard rate
of labor. Employing highly skilled laborers as well as overtime premium added to direct labor
cost, usually lead to unfavorable variance.

Supervisors and or person in charge of setting labor rates are mainly responsible for this
variance.

2. Labor Time (efficiency) variance - results from actually using more or less time than the
standard labor time allowed for actual production. Employing highly skilled laborers and
production process control measures usually lead to favorable variance. Thus, it is the
responsibility of the production manager.

C. FACTORY OVERHEAD VARIANCES

1. Controllable Variances (Variable OH spending, Fixed OH spending and Variable OH efficiency)

are the responsibility of the production department manager since incurrence of these costs
as well as efficiency of operations is within his control.

2. Capacity (Volume) Variance arises from under or over utilizing the normal production capacity
of the firm. The number of units to be produced (and the corresponding production hours)
depends on the projected sales and ending inventory policy set for the firm. Therefore, the
responsibility should not be charged to the production manager but rather to the sales
department manager that projects the sales and the top management that sets the inventory
policy.
DISCUSSION QUESTIONS:

1. What is meant by a standard? What are the different kinds of standards and how do
they affect the motivation of workers?
2. Discuss why product specifications are important in establishing standards.
3. Discuss the benefits of using standard costing?
4. Explain how materials, labor and factory overhead standards are set.
5. What are the three activities involved in determining a standard costing system?
6. Discuss the differences between fixed budgets and flexible budgets.
7. Give some causes of an unfavorable labor rate variance.
8. How does the calculation of a mix variance differ from the computation of the
quantity variance?
9. Discuss the relevance of the labor efficiency variance to the overhead efficiency
variance.
10. The isolation of a yield variance results in a yield variance not only for materials but
also for labor and factory overhead. Why?