How to Report Variances
Sep 17, 2015
A few months ago I was teaching a seminar on cost accounting to a group of accountants, most of who worked in the manufacturing industry. Although we had a specific agenda of topics to be covered, there were a number of discussions ignited throughout the day related to costing themes not represented on the agenda.
In my opinion, one of the real benefits of attending a cost-related course is hearing various points of view on a given subject. Typically you obtain information from individuals who have experience in costing and have chosen one method over another as it relates best to their specific circumstances. These discussions can be invaluable for a cost manager attempting to rectify a complicated issue related to their own situation.
During our course, we discussed the variety of method for presenting variances. A participant was particularly interested in segregating his material usage variance into other usage variance and scrap variance. In his case, management was most concerned with identifying and controlling scrap with the hope that unnecessary scrap could be reduced or eliminated.
Management’s request would require periodic measurement of actual scrap and the creation of standard scrap levels for the purpose of determining a goal. Since control and improvement were the ultimate reason for this change, the quicker one could identify when the scrap was occurring in the details of the process, the sooner controls could be placed on the cost.
Specifically, this participant was working to identify scrap by shift with the ultimate goal of identifying scrap by the job per shift. Such precise identification of scrap would require much-improved accounting procedures and modifications to operations to identify the causes and amount of scrap being created in a 24-hour period. This computed variance must be frequently reconciled to the overall usage calculation to ensure the cost system and the shop floor accounting system is producing accurate results.
In this case, the management team was satisfied with the results by shift and confident in the accuracy enough to gain the control necessary to identify the causes for the excess scrap. However, there was a concern about the additional time and effort it was going to take to monitor scrap by job, particularly in those areas where job changes occurred frequently during the day and there was a low volume, high turnover of manufacturing parts.
This discussion prompted other dialogs about how variances may be differentiated into subcomponents including labor variances analyzed between direct labor and set-up labor, or perhaps labor segregated into set-up, quality, and production. The methods for determining overall cost and efficiency variances is only limited by the needs of the manufacturing team and the cost accounting system which supports the manufacturing area and the cost accounting process.
Have you attempted to apply different analysis with regard to scrap variances? What have you done? Anytime you have the opportunity to talk to others about what they are doing related to costing, take it!
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