Who is Responsible for Direct Materials Quantity Variance?

Generally, production department is responsible to see that material usage is kept in line with
standards. However, purchasing department may be responsible for unfavorable materials
quantity variance if it is caused by poor quality of materials. If purchasing department obtains
inferior quality materials in effort to economize on price, the materials may be unsuitable for use
and may result in excessive waste. Thus purchasing department rather than production
department would be responsible for the quantity or usage variance.

A word of caution is in order. Variance analysis should not be used as an excuse to conduct witch
hunts or as a means of beating line managers and workers over the head. The emphasize must be
on control in the sense of supporting the line managers and assisting them in meeting the goals
that they have participated in setting for the company. In short, the emphasize should be positive
rather than negative. Excessive dwelling on what has already have happened, particularly in
terms of trying to find someone to blame, can destroy morale and kill any cooperative spirit.

Who is Responsible for Direct Materials Price Variance?

Generally speaking, the purchase manager has control over the price paid for goods and is
therefore responsible for any price variation. Many factors influence the price paid for the goods,
including number of units ordered in a lot, how the order is delivered, and the quality of
materials purchased. A deviation in any of these factors from what was assumed when the
standards were set can result in price variance. For example purchase of second grade materials
rather than top-grade materials may be a reason of favorable price variance, since the lower
grade material will generally be less costly but perhaps less suitable for production and can be a
reason of unfavorable materials quantity variance.

However, someone other than purchasing manager could be responsible for materials price
variance. For example, production is scheduled in such a way that the purchasing manager must
request express delivery. In this situation the production manager should be held responsible for
the resulting price variance.

A word of caution is in order. Variance analysis should not be used as an excuse to conduct witch
hunts or as a means of beating line managers and workers over the head. The emphasize must be
on control in the sense of supporting the line managers and assisting them in meeting the goals
that they have participated in setting for the company. In short, the emphasize should be positive
rather than negative. Excessive dwelling on what has already have happened, particularly in
terms of trying to find someone to blame, can destroy morale and kill any cooperative spirit.

Who is Responsible for the Labor Efficiency/Usage Variance?

The manager in charge of production is generally considered responsible for labor efficiency
variance. However, purchase manager could be held responsible if the acquisition of poor
materials resulted in excessive labor processing time.
If customers orders are insufficient to keep the workers busy, the work center manager has two
options, either accept an unfavorable labor efficiency variance or build up inventories. The
second option is opposite to the basic principle of just in time (JIT). Inventories with no
immediate prospect of sale is a bad idea according to just in time approach. Inventories,
particularly work in process inventory leads to high defect rate, obsolete goods, and generally
inefficient operations. As a consequence, when the work force is basically fixed in the short
term, managers must be cautious about how labor efficiency variances are used. Some managers
advocate dispensing with labor efficiency variance entirely in such situationsat least for the
purpose of motivating and controlling workers on the shop floor.

Uses of Cash Flow Statement: 9 Uses | Financial Analysis

This article throws light upon the nine main uses of cash flow statement.

Use of Cash Flow Statement # 1. Since a cash flow statement is based on the cash basis of
accounting, it is very useful in the evaluation of cash position of a firm.

Use of Cash Flow Statement # 2. A projected cash flow statement can be prepared in order to
know the future cash position of a concern so as to enable a firm to plan and coordinate its
financial operations properly. By preparing this statement, a firm can come to know as to how
much cash will be generated into the firm and how much cash will be needed to make various
payments and hence the firm can well plan to arrange for the future requirements of cash.

Use of Cash Flow Statement # 3. A comparison of the historical and projected cash flow
statements can be made so as to find the variations and deficiency or otherwise in the
performance so as to enable the firm to take immediate and effective action.

Use of Cash Flow Statement # 4. A series of intra-firm and inter-firm cash flow statements
reveals whether the firms liquidity (short-term paying capacity) is improving or deteriorating
over a period of time and in comparison to other firms over a given period of time.

Use of Cash Flow Statement # 5. Cash flow statement helps in planning the repayment of loans,
replacement of fixed assets and other similar long-term planning of cash. It is also significant for
capital budgeting decisions.

Use of Cash Flow Statement # 6. It better explains the causes for poor cash position in spite of
substantial profits in a firm by throwing light on various applications of cash made by the firm. It
further helps in answering some intricate questions like -what happened to the net profits? Where
did the profits go? Why more dividends could not be paid in spite of sufficient available profit?

Use of Cash Flow Statement # 7. Cash flow analysis is more useful and appropriate than funds
flow analysis for short-term financial analysis as in a very short period it is cash which is more
 elevant then the working capital for forecasting the ability of the firm to meet its immediate
obligations.

Use of Cash Flow Statement # 8. Cash flow statement prepared according to AS-3 (Revised) is
more suitable for making comparisons than the funds flow statement as there is no standard
format used for the same.

Use of Cash Flow Statement # 9. Cash flow statement provides information of all activities
classified under operating, investing and financing activities. The funds statement even when
prepared on cash basis, did not disclose cash flows from such activities separately. Thus, cash
flow statement is more useful than the funds statement.

Standard costing is the practice of substituting an expected cost for an actual costin the accounting
records, and then periodically recording variances showing the difference between the expected and
actual costs.

Importance of Standard Costing

Increase the efficiency
Account manager fixes the standard cost of direct material, labor and overheads and pre-determined standard
cost increases the efficiency of production, every worker produce goods according to standard cost. After this
actual cost is also compare with standard cost. With this comparison, manager will succeed to increase the
efficiency of worker for reducing cost.

Effective utilization of resources

Standard costing is also helpful for effective utilization of resources. We can explain this with small example
Suppose, A company purchase following raw material without setting any standard cost.

Name of Item Actual Cost

x - material $ 40000
y - material $ 30000
z - material $ 20000

Because A company cannot set the standard of quantity and rate of raw material cost . It may possible.

Company has purchased raw material more than current production and extra raw material is the waste
of working capital.
 Company does not research the market , it may possible that one supplier can supply same
raw material with following cost

Name of Item Actual Cost

x - material $ 35000
y - material $ 20000
z - material $ 15000

Now company will face the total loss due to not utilization his resources effectively and standard costing is
only way to effective utilization for reducing cost.

Use in Budgetary Control

Standard costing can also use in budgetary control. We know that budgetary control is the part of management
and in controlling, it can be used. In budgetary control, not only standard cost is calculated but after comparing
relative actions of improvement are taken. With standard costing, effective control of cost can be possible.

Proper decisions
Standard costing is also helpful for taking proper decisions for deciding cost. There are large number of
expenses and there are many alternatives of these expenses. When standard cost is decided at that time, best
alternative from different expenses is chosen and it will reduce extra cost burden.

Price variance is isolated for the full amount purchased as soon as possible, and
the quantity variance is calculated only for the materials consumed
in production.
Isolation of Material Variances need the variances as soon as possible so that I can better identify
problems and control costs. You accountants just dont understand the problems we production
managers have.Okay.Ill start computing the price variance when material is purchased and the

quantity variance as soon as material is used .

Advantages of Standard Costs
1. Facilitate management Planning
2. Promote greater economy by making employees more cost-conscious
3. Useful in setting selling Prices
4. Contribute to management control by providing basis for evaluation of cost control
5. Useful in highlighting variances in management by exception
 6. Simplify costing of inventories and reduce clerical costs

If used as punitive tools, standards can undermine goal setting and can breed resentment toward
the organization. Standards should not be used as an excuse to conduct witch-hunts, or as a
means of finding someone to blame for problems.