The cost variance is the difference between a budgeted/planned value and actual meanings. Thereby, the variance for total labor hours is 5,000, for total labor cost, it is 245,000, for total machine hours, it is 1,255, and for total machine costs, it is 187,750. Besides, the variance of the total number of kilograms used is 4,938, and for total material costs, it is 405,000.
Certainly, all the variances are essential to analyze since it helps identify vital indicators for business effectiveness. Calculating variances helps to demonstrate the effectiveness or downsides of particular financial or business processes (Cahyo, 2019). However, the critical variance is related to total labor hours and total labor costs. In this regard, it shows efficiency or errors in the distribution of labor. In other words, the analysis of these points will help to demonstrate how the planned values differ from the actual ones. Thus, one will be able to realize whether the chosen strategy is effective and, if necessary, change it. Moreover, when developing new strategies, one can be based on these values, which contributes to a more efficient process.
Total machine hours and total machine costs are no less important in terms of analyzing the effectiveness of productivity and the business as a whole. These indicators show how the planned production pace and machine running time differ from the actual one. In addition, it shows the planned and actual price, which clearly demonstrates the degree of deviation in the production aspect. Based on these data, one can adjust the production process in such a way as to balance and find the required pace. Mainly, it consists in finding and leveling the deviation and maintaining the balance.
The labor efficiency variance implies a deviation of the actual production rate from that which has been determined as recommended by experts. In other words, it shows how much a particular production unit is behind or ahead of the actual production time. The manager can take action to speed up the process or increase the production quantity if the recommended time is exceeded. Measures that can be taken to correct the delay from the recommended period include those that are aimed at solving certain problems. For example, technologists may decide to reduce manufacturing defects by making the process more thorough. It will save time searching for and replacing defective products and increase the production quantity since fewer items will be disposed of.
In the aspect of cost modeling, the approach to labor efficiency variance is formulated by calculating the difference between actual hours and standard hours. Hereafter, one should multiply the meaning by the standard rate, and it would constitute the labor efficiency variance for a particular case. In this regard, it will have the following items: 7,500 (actual hours) – 12,500 (standard hours) * 25 (standard rate) = -125. As one may notice, it indicates a misallocation of resources, namely the time allotted for the production of certain units of output. In this case, it is necessary to take measures to correct the situation described above.
Reference
Cahyo, W. N. (2019). Life cycle cost model to support asset management decision making. University of Indonesia.