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1) Material Variance
Material Cost Variance:
Meaning: Material Cost Variance is the difference between the standard cost of material specified for the output achieved and the actual cost of direct material used. Computation: This is total variance and hence computed as follows MCV = Standard Cost for Standard Quantity Actual Cost for Actual Quantity. = (SQ x SP) (AQ x AP) Note: The variances can be computed by using any of the above methods. Interpretation: Material Cost Variance is said to be favourable when the Actual Cost is less than the Standard Coat; and adverse when the Actual Cost is more than the Standard Cost. These variances are caused by the variations in the quantity and the price. Hence, Material Cost Variance [Total Variance} is further divided into (a) Material Usage Variance [Quantity Variance] and (b) Material Price Variance [Rate Variance].
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Interpretation: If the Actual Price is equal to the Standard Price, Material Cost Variance is equal to Material Usage Variance. Material Usage Variance is said to be favourable when the Actual Quantity is used less than the Standard Quantity; and adverse when the Actual Quantity is more than the Standard Quantity.
Interpretation: Material Mixture Variance is said to be favourable when the Actual Mix is less than the Standard Mix (i.e. the actual input is less than the Revised Input). It is said to be adverse when the Actual Mix is more than the Standard Mix.
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Labour Variance
than the Standard cost. This variation is the efficiency of labour and the wage rate. Hence, Labour Cost Variance (Total variance) is further divided into (a) Labour efficiency Variance (Time Variance) and (b) Labour Rate Variance (Rate Variance).
payment, overtime, and new workers paid at less rates, wrong standard or wrong recording of actual rates etc.
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3)
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Definition: Fixed overheads capacity variance is the portion of fixed overheads volume variance due to the difference between the actual volume of output specified and the budgeted volume of output. Computation: the computation, when the volume is given in the terms of hours, is as followsFCPV = (Actual hours Budgeted Hours) x Standard Rate = (AH BH) x SR Interpretation: Fixed overheads capacity variance is said to be favourable when the actual hours are less than the budgeted hours: and adverse when the actual hours are more than the budgeted hours.
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Definition: Variable overheads efficiency variances are the portion of variable overheads variances due to the difference between the standard volume of output specified and the actual volume of output. Computation: The computation, when the volume is given in the terms of hours, it is given as VEFV = (Standard hours Actual Hours) x Standard Rate = (SH AH) x SR Interpretation: Variable Overheads Efficiency Variance is said to be favourable when the actual hours are less than the standard hours; and adverse when the actual hours are more than the standard hours.
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Benchmarking
Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost. In the process of benchmarking, management identifies the best firms in their industry, or in another industry where similar processes exist, and compare the results and processes of those studied (the "targets") to one's own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful. The term benchmarking was first used by cobblers to measure people's feet for shoes. They would place someone's foot on a "bench" and mark it out to make the pattern for the shoes. Benchmarking is used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others. Also referred to as "best practice benchmarking" or "process benchmarking", this process is used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice companies' processes, usually within a peer group defined for the purposes of comparison. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their practices.
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Types of Benchmarking:
Process benchmarking - the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration. Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity. Benchmarking from an investor perspective- extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor. Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms. Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses. Strategic benchmarking - involves observing how others compete. This type is usually not industry specific, meaning it is best to look at other industries. Functional benchmarking - a company will focus its benchmarking on a single function to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison. Best-in-class benchmarking - involves studying the leading competitor or the company that best carries out a specific function. Operational benchmarking - embraces everything from staffing and productivity to office flow and analysis of procedures performed.[5]
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Energy benchmarking - process of collecting, analyzing and relating energy performance data of comparable activities with the purpose of evaluating and comparing performance between or within entities[6]. Entities can include processes, buildings or companies. Benchmarking may be internal between entities within a single organization, or - subject to confidentiality restrictions external between competing entities.
Performance Appraisal
Performance appraisal is the process of obtaining, analyzing and recording information about the relative worth of an employee. The focus of the performance appraisal is measuring and improving the actual performance of the employee and also the future potential of the employee. Its aim is to measure what an employee does. According to Flippo, a prominent personality in the field of Human resources, "performance appraisal is the systematic, periodic and an impartial rating of an employees excellence in the matters pertaining to his present job and his potential for a better job." Performance appraisal is a systematic way of reviewing and assessing the performance of an employee during a given period of time and planning for his future. It is a powerful tool to calibrate, refine and reward the performance of the employee. It helps to analyze his achievements and evaluate his contribution towards the achievements of the overall organizational goals. By focusing the attention on performance, performance appraisal goes to the heart of personnel management and reflects the management's interest in the progress of the employees. Objectives of Performance appraisal: To review the performance of the employees over a given period of time. To judge the gap between the actual and the desired performance. To help the management in exercising organizational control. Helps to strengthen the relationship and communication between superior subordinates and management employees. To diagnose the strengths and weaknesses of the individuals so as to identify the training and development needs of the future. To provide feedback to the employees regarding their past performance. Provide information to assist in the other personal decisions in the organization. Provide clarity of the expectations and responsibilities of the functions to be performed by the employees. To judge the effectiveness of the other human resource functions of the organization such as recruitment, selection, training and development.
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Performance Appraisal is being practiced in 90% of the organisations worldwide. Self-appraisal and potential appraisal also form a part of the performance appraisal processes. Typically, Performance Appraisal is aimed at: To review the performance of the employees over a given period of time. To judge the gap between the actual and the desired performance. To help the management in exercising organizational control. To diagnose the training and development needs of the future. Provide information to assist in the HR decisions like promotions, transfers etc. Provide clarity of the expectations and responsibilities of the functions to be performed by the employees. To judge the effectiveness of the other human resource functions of the organization such as recruitment, selection, training and development. To reduce the grievances of the employees. Helps to strengthen the relationship and communication between superior subordinates and management employees.
The most significant reasons of using Performance appraisal are: Making payroll and compensation decisions 80% Training and development needs 71% Identifying the gaps in desired and actual performance and its cause 76% Deciding future goals and course of action 42% Promotions, demotions and transfers 49% Other purposes 6% (including job analysis and providing superior support, assistance and counseling)
Case Study
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9000
13600
Standard Time / Unit = 6000 Hrs / 1500 Units = 4 Hrs / Unit Standard Rate / Hour = Rs. 9000 / 6000 Hrs = 1.5 Rs / Hour Standard Time Required for Actual Output =1600 Units x 4 Hrs / Unit =
6400 Hrs
Standard Cost for Actual Output = 6400 Hrs x 1.5 = Rs. 9600
Actual Overhead (AO) = Rs.13600 Budgeted Overhead (BO) = Rs.9000 Standard Overhead (SO) = Rs.9600
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A B C Total
Computation of Variances:
Labour Variance Labour Cost Variance (LCV) = Standard Cost Actual Cost Skilled Semi Skilled Unskilled TOTAL 14400 15600 5760 5000 9600 9000 1200(A) 760(F) 600(F) 160(F)
Labour Efficiency Variance (LEV) = (Std Hrs Actual Hrs) x Std Rate Skilled Semi Skilled Unskilled TOTAL (2880 3000) x 5 (1920 2000) x 3 (4800 5000) x 2 600(A) 240(A) 400(A) 1240(A)
Labour Rate Variance (LRV) = (Std Rate Actual Rate) Actual Hours Skilled (5 5.2) x 3000 600(A)
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Labour Mix Variance (LMV) = (Revised Hrs Actual Hrs) x Std Rate Skilled Semi Skilled Unskilled TOTAL (3000 3000) x 5 (2000 2000) x 3 (5000 5000) x 2 Nil Nil Nil NIL
Labour Yield Variance (LYV) = SKILLED SEMI SKILLED UNSKILLED TOTAL (2880 3000) x 5 (1920 2000) x 3 (4800 5000) x 2 600(A) 240(A) 400(A) 1240(A)
Fixed Overheads Variances 1) Total Fixed Overheads Variances = Standard OH Actual OH TFOV = (9600 13600) TFOV = 4000 (A) Fixed Overheads Volume Variance = Standard OH Budgeted OH FOVV = (9600 9000) FOVV = 600 (F)
2)
FOEV = 4600 (A) 4) Fixed Overheads Efficiency Variance = (Standard Hrs Actual Hrs) x Standard Rate FEFV = (6400 7200) x 1.5 FEFV = 1200 (A) 5) Fixed Overhead Capacity Variance = (Actual Hrs Budgeted Hrs) x Standard Rate FCPV = (7200 6000) x 1.5 FCPV = 1800 (F) Material Variance Material Cost Variance (MCV) = Standard Cost Actual Cost MATERIAL A B C Total SC - AC (2000 4800) (6400 4050) (8400 4900) A/F 2800(A) 2350(F) 3500(F) 3050(F)
Material Usage Variance (MUV) = (Std Qty Actual Qty) x Std Rate MATERIAL A B C Total (SQ AQ) x SR (400 800) x 5 (640 450) x 10 (560 350) x 15 A/F 2000(A) 1900(F) 3150(F) 3050(F)
Material Price Variance (MPV) = (Std Rate Actual Rate) x Actual Qty
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MATERIALS A B C Total
Benchmarking of Variances: Here we evaluate and decide the benchmark of variances for performance appraisal. Normally the benchmarking is done on industrial average as in this method all economic factors which affects this Industry are taken into consideration. For example, a) Export Import Business: USD Rupee Fluctuation b) Manufacturing: Uncontrolled Inflation
In this case the following benchmarks were kept for evaluation of the performance. 1) LCV = 100 (F) 2) LEV = 1000 (A) 3) LRV = 1200 (F) 4) TFOV = 3000 (A) 5) FOVV = 1000 (F) 6) FOEV = 4000 (A) 7) MCV = 3500 (F) 8) MPV = 2700 (F) 9) MUV = 1200 (F) After Comparing the Actual Results with the Specified Benchmarks we conclude the following 1) Satisfactory 2) Un Satisfactory, need to be investigated 3) Satisfactory 4) Not Satisfied 5) Much more expected, need to work Hard 6) Nice Planning
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7) Need to Find out Cost Hike Reason 8) Price was Favourable 9) Under Utilisation of Resources
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