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Under costing, Is a favorable variance always an indicator of efficiency in operation?

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تم إضافة السؤال من قبل Rehan Qureshi , Financial Consultant , Self Employeed
تاريخ النشر: 2014/01/10
Rehan Qureshi
من قبل Rehan Qureshi , Financial Consultant , Self Employeed

In a standard costing system, some favorable variances are not indicators of efficiency in operations. For example, the materials price variance, the labor rate variance, the manufacturing overhead spending and budget variances, and the production volume variance are generally not related to the efficiency of the operations. On the other hand, the materials usage variance, the labor efficiency variance, and the variable manufacturing efficiency variance are indicators of operating efficiency. However, it is possible that some of these variances could result from standards that were not realistic. For example, if it realistically takes2.4 hours to produce a unit of output, but the standard is set for2.5 hours, there should be a favorable variance of0.1 hour. This0.1 hour variance results from the unrealistic standard, rather than operational efficiency.

Mohammad Tohamy Hussein Hussein
من قبل Mohammad Tohamy Hussein Hussein , Chief Executive Officer & ERP Architect , Egyptian Software Group

I don't think so. Under costing almost always indicates a problem either in the planning or in the implementation and it must be checked to identify the root cause and plan to fix it.

Khaled Abdelrehim ACCA DipIFR CMA
من قبل Khaled Abdelrehim ACCA DipIFR CMA , Financial Analysis Assistant General Manager , Khalda Petroleum Company

May be an indicator of a budget slac or a change in prices.

Subhranshu Ganguly
من قبل Subhranshu Ganguly , Quality Analyst. , WIPRO

No . A decrease in the cost of raw materials may cause a favourable variance.

Mubashir Shahzad
من قبل Mubashir Shahzad , Oracle Functional Consultant/ERP Business Analyst , Jaffer Business System

it depends on the overall variance figure and how it is acheived.

for example, a favourable materail price variance can be acheived through buying low quality material, gaining excessive discounts and favourable price movements.But on the side, material usage variance might be largely adverse due to inefficient usage, low quality,hig wastage, material detoriation due to poor handling or lack of usibility.

so, in a nutsheel,its all related to each other and hence difficult to point out in separation.

hany moris
من قبل hany moris , Financial Controller , Danone Egypt

Favorable Variance may be due to  under filling or Production is not following up the recepie   

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