In this article we will discuss about:- 1. Causes of Cost Variance 2. Reasons for Cost Variances 3. Interdependence between Variances.
Causes of Cost Variance:
The causes of variances can be categorized as follows:
(a) Implementation deviation results from a human or mechanical failure to achieve an attainable income.
(b) Prediction deviation results from errors in specifying the parameter values in decision model.
(c) Measurement deviation arises as a result of error in measuring the actual outcome.
(d) Model deviation arises as a result of an erroneous formulation in a decision model.
(e) Random deviations due to chance fluctuations of a parameter for which no cause can be assigned.
Reasons for Cost Variances:
There are many possible reasons for cost variances arising due to efficiencies and inefficiencies of operations, errors in standard setting, changes in exchange rates etc. Table given below gives a list of a possible causes of cost variances. This is not an exhaustive list.
Interdependence between Variances:
The cause of one variance may be wholly or partly explained by the cause of another variance.
Examples could be as follows:
(a) If the purchasing department buys a cheaper material which is poorer in quality than the expected standard, the material price variance will be favourable, but this may cause material wastage and an adverse usage variance.
(b) Similarly, if employees used to do some work are highly experienced, they may be paid a higher rate than the standard wage per hour, but they should do the work more efficiently than employees of average, skill, i.e., an adverse rate variance may be compensated for by a favourable efficiency variance.
(c) An increase in sales price may result in a fall in sales volume below budgeted levels i.e., a favourable sales price variance may result in an adverse sales volume variance.