IN TO THE CONCEPT- VARIANCES

A variance is the study of difference between actual result and expected performance. The expected performance is also called budgeted performance, which is a point of reference for making comparisons. Variances lie at the point where the planning and control functions of management come together. They assist managers in implementing their strategies by enabling management by exception. This is the practice of focusing management attentions on areas that are not operating as expected (such as a larger shortfall in sales of a product) and devoting less time to areas operating as expected. In other words, by highlighting the areas that have deviated most from expectations, variances enables manager to focus their efforts on the most critical areas. If the actual cost is much higher than budgeted, the variances will guide managers to seek explanations and to take early corrective action, ensuring that future operations result in less scrap and rework. Sometime a large positive variance may occur, such as a significant decrease in manufacturing cost of the product. Managers will try to understand the reasons for this decrease, for example, better operator training or changes in manufacturing method, so these practices can be appropriately continued and transferred to other divisions within the organization. Variances are also used in performance evaluation and to motivate managers. Sometime Variance analysis suggests that the company should consider a change in strategy. For example, large negative variances caused by excessive defect rates for a new product may suggest a flawed product design. Managers may than want to investigate the product design and potentially change the mix of products being offered.
1

Variance analysis contributes in many ways to making the five step decision process more effective . It allows managers to evaluate performance and learn by providing a framework for correctly assecing current performance. In turn managers take corrective actionto ensure that decisions are implemented correctly and that previously budgeted result are in fact attained. Variance also enables managers to generate more informed predictions about the future, and thereby improve the quality of five step decision making process.

Favorable and unfavorable Variances: Favorable: Has

budgeted revenues. An unfavorable variance: has the effect, when viewed in isolation of decreasing operating income relative to the budgeted amount. Unfavorable variances are also called adverse variances in some countries. the effect, when considered in isolation, of increasing operating Favorable means actual revenues exceed

income relative to the budget amount.

Price variance and Efficiency variance for direct cost input

To gain further insight, almost all companies subdivide the flexible budget a variance for direct cost input into two more detailed variances:A price Variance that reflect the difference between an actual input price and a budgeted input price.

An efficiency variance that reflect the difference between an actual input quantity and a budgeted input quantity.

The information available from these variances helps managers to better understand past performance and take corrective action to implement superior strategies in the future. Managers generally have more control over efficiency variances than price variance. Thats because the quantity of input used is primarily affected by the factors inside the company, but price changes are primarily due to market forces outside the company.

Management uses of Variances:

Management and accountants use variances to evaluate performance after decisions are implemented, to trigger organizational learnings, and to make continuous improvements. Variances serve as an early warning system to alert management to existing problems or to prospective opportunities. Variance analysis enables managers to evaluate the effectiveness of the actions and performance of personnel in the current period, as well as to fine tune strategies for achieving improved performance in the future. To make sure that managers interprete variances correctly and make appropriate decision based on them , managers need to regognize that variances can have multiple causes IN TO THE CONCEPT- VARIANCES A variance is the study of difference between actual result and expected performance . The expected performance is also called budgeted performance , which is a point of reference for making comparisons. Variances lie at the point where the planning and control functions of management come together. They assist managers in implementing their strategies by enabling management by exception.This is the practice of focusing management attentions on areas that are not operating as expected(such as a larger shortfall in sales of a product) and devoting less time to areas operating as expected. In other words , by highlighting the areas that have deviated most from expectations , variances enables manager to focus their efforts on the most critical areas. If the actual cost are much higher than budgeted , the variances will guide managers to seek explanations and to take early corrective action, ensuring that future operations result in less scrap and rework. Sometime a large positive variance may occure , such as a significant decrease in manufacturing cost of the product. Managers will try to understand the reasons for this decrease , for example , better operator training or changes in manufacturing method ,
4

so these practices can be appropriately continued and transferred to other divisions within the organization. Variances are also used in performance evaluation and to motivate managers . Sometime Variance analysis suggest that the company should consider a change in strategy. For example, large negative variances caused by excessive defect rates for a new product may suggest a flawed product design. Managers may than want to investigate the product design and potentially change the mix of products being offered. Variance analysis contributes in many ways to making the five step decision process more effective . It allows managers to evaluate performance and learn by providing a framework for correctly assessing current performance. In turn managers take corrective action to ensure that decisions are implemented correctly and those previously budgeted results are in fact attained. Variance also enables managers to generate more informed predictions about the future, and thereby improve the quality of five step decision making process

Objectives of the Study

Major
To study the cost allocation and Profit margin Projection in the contractual work To study the reasons for variations in Projected profitability and Actual Profit Understanding the cost allocation methodology Understanding the effect of variation factors on Cost and Profit

Supportive
To gain the overall idea about the organization working To gain a firsthand knowledge about the Budgeting and the functioning with Budgeting . To have an effective exposure of the actual working situation and problems. To study the rules and practices implemented and its effect. To see the applicability and usability of theory which have been taught to us during the first year of the course. To find out the financial performance of the organization. To find out the importance of finance in business. To know what all studies are made before setting up Budget of a contractual work.
Appreciate the potential enhancement of financial control which may result from

availability of detailed variance information; Appreciate how a system of detailed variance analysis may exacerbate the argued general shortcomings of standard costing and budget variance analysis, along with arguments about the relevance of such systems in modern operating environments.

Hypothesis of the study:

Variance Analysis helps to maintain the financial position of the organization. Variance Analysis is the tool for financial analysis. Variance Study support the organization for evaluating the performance during the different situation.

Gammon India Limited (Builders to the Nation)

Gammon India Limited, the only Indian Construction Company to have been accredited with ISO 9001 certification for all fields of Civil Engineering Works including design, stands out as the gateway for Technological and Engineering excellence in Civil Engineering fields. Gammon's dedicated and experienced team of planners, designers and construction engineers are ever ready to contribute their expertise together and turn vision into reality. This has led us to the position of one of the leading engineering and construction companies in India. Gammon India is not only the largest civil engineering construction company in India, but can lay claim for the largest number of bridges built in the whole of Commonwealth. With over seventy years of tradition in the field of construction. Gammon is a name that is inextricably woven into the fabric of India. As builders to the nation, Gammon has made concrete contributions by designing and constructing bridges, ports, harbours, thermal and nuclear power stations, dams, highrise structures, chemical and fertilizer complexes environmental structures, cross country water, oil and gas pipelines. Gammon has accomplished this by fusing tremendous engineering knowledge with innovative skills, harnessing men and materials to build structures. Structures that stand out as living testimonies to the victory of man over nature. Structures conceived and built by minds in constant search of new methods, ideas, applications and solutions. Because Gammon believes that today's solutions will not be adequate tomorrow. This insatiable quest has led Gammon to pioneer Reinforced and Prestressed Concrete, Long span bridges, Under water concreting using the Colcrete process, Thin shell
8

structures, Non-Shrinking concrete, Aluminium trusses for launching precast, prestressed beams and many more. These resounding achievements have won Gammon the status of an R&D Institution an unequalled honour for an unmatched Performance. The planners, designers and construction specialists at Gammon have proved their competence and innovative skills here and abroad. And driving them to seek, to build and not to yield, is a team of professionals at the Head Office led by the Chairman & Managing Director, Mr. Abhijit Rajan.

Gammon India Limited at Tiroda Civil and Chimney Works

Gammon India Limited is the construction company working at Adani Power Maharashtra Limited for the construction of Multiflue and Twin flue Chimney and Miscellaneous Civil and Structural works. It has a contract for almost all Major Civil job construction. It has its concrete production establishments and all type of Mobilizations for carrying this work. Gammon has its all establishment at Tiroda Project under the Leadership of Mr. Pankaj Srivastava. Gammon at this project is working for number complex structures in power plant such as Transmission yard building, Boilers, Coal Handling Plant, Chimney, Pump-House, Crusher House etc.of civil works such. The schedule and job codes for its operations for this Project are as follows:-

Sr. No.

Job Code

Work Specification

Start Date

Completion Total Date Duration (Months)

8716

Construction of Multiflue RCC Chimney for Phase 1,2,3

8717

Construction Misslaneous Architactural phase 1,2,3 Civil Works

of and for

8834

Construction of Twin flue Chimney For Phase 4 &5

8842

Construction Misslaneous Architactural Phase 4 & 5 Civil works

of and for

Contractual Value For the each job Sr. No. 1 2 3 4 Job Code 8716 8717 8834 8842 Job Value (in Lacs)

10

Authority Structure at Tiroda Project

Project Leader
(Pankaj Srivastava)

Common Departments for All

Planning

Billing

Execution

Safety Execution

Admin/ PR

Accounts

Store

Deputy Manager-I

Sr.No 1 2 3 4 5 6 7 P.M. D.M.-I D.M.-II A.M.-I A.M.-II Officers Staff

Staff 1 2 5 20 30 5 70

Deputy Manager-II

Assistant Manager-I

Assistant Manager-II

Officers

Staff

Staff Ratio
1 2 10 5 3 4 P.M. DM-I DM-II AM-I AM-II

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Job Description
As already defined Gammon India Limited is a construction company therefore at this project Also it has a job of all type of construction works due to the large scope of work. Job involves the large number of workforce including skilled and unskilled labours. Our major construction jobs at this project includes the concrete work. Therefore we incur the large proportion of expenses on labour for Wages , On material (Sand, Aggregate, Cement etc). Apart from this, work includes number of machineries which require fuel and other sources of power.

Supportive departments have been established at site to support the productive activities such as Safety Department, admin department, welfare department etc. All these supportive departments incure the cost which are included in Yellow Sheet and Blue Sheet Expenses. Blue Sheet Expenses- Direct Cost Involve in Project Yellow Sheet Expenses Indirect Costs involved in Project Billing of the contract is made at monthly basis with client and after certification of the work we get the payments at Head Office through artigeous. At head office provisions and HO Expenses are deducted and then remaining fund is transferred to the Site for making payments to direct and indirect cost.

12

Research Methodology
Analytical Research Methodology is been used for undertaking the study. Under this method the secondary data been provided by the company finance and Planning department. This data was analyzed up to the marks of the methodology thought under the curriculum and suitable for the variance analysis. Study undertakes the concepts of Budget preparation and actual expenditures with their impact on profitability . Apart from the secondary data personal interviews has been carried with the people involved in the process of Budget creation and the Billing and Execution team to carry opinions on the reflection of variances.

Study has carried under the following structure:

1. Formulating the research Problem:
Study been undertaken to study the problem of variances in expected profitability and actual profitability. To the great extent it is been experienced that most of the project works faces problems of profit

differences due to changes in budgeted and actual price and efficiency variances.

2. Extensive literature survey: The study has been carried under the concepts of the budget creation and the variance measurement methodologies.

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3. Development of working Hypothesis: It is been general tendency to evaluate the variances due to the cost differences in project work. This study has been undertaken to know the actual reasons in the problems.

4. Research Design: Research study has been carried during the one year of placement period therefore it includes the practical knowledge and data gathered from the internal sources within period. Research has been carried under the proper guidance of the Planning &Billing, Accounts, and Execution heads at Gammon India Limited, Tiroda.

5. Sample Design: Research has been carried on the deliberated samples suitable and useful for the study.

6. Data Collection: Study is based on the data collected through planning, billing and Accounts department of Gammon India limited, Tiroda. It includes data based on the observation, Personal Interviews, and log books of company.

7. Execution of the study: After collecting the valid and systematic data from the first hand information whole study has been provided the shape.

14

8. Analysis of data; Analysis of the data has been made on the three levels of the variance as follows: First Level Second Level Third Level

9. Hypothesis testing: Presented results has been comrared with the hypothesis made for the study and it is found reasonable that due to the price/cost differences works. most of the variances arises in the contractual

15

Implementing Corporate Cost Allocation At Gammon India Limited To provide information for economic decision To motivate managers and other employees To justify cost or compute reimbursement amounts To measure income and asset

Criteria To Cost Allocation

Cause And Effect Benefit received Fairness and equity Ability to bear

Cost Allocation and Costing System

Corporate Cost o Treasury Cost o Human Resourse Management o Corporate Administration cost Divison Cost o Direct Cost o Indirect Cost Model Used in Calculating of Variances
We will take a closer look at the variance by examining Gammon Indias accounting system. This study is exhibited in the chapters called levels followed by the numbers
16

denotes the amount of detail shown by a variance analysis. Level1 reports the least detail, level2 offer more information and so on. Gammon India Limited being a construction compony produces the concrete as its major source of generating profit at project. Apart from this it also serves number of other construction services to its client. In this study its main objective i.e. Concrete is considered for calculating the variance and to come at the decision regarding reason at end.
A)STATIC BUDGET AND STATIC BUDGET VARIANCES B) FLEXIBLE BUDGET VARIANCES AND SALES VOLUME VARIANCES

STATIC BUDGET AND STATIC BUDGET VARIANCES

Note 1: The data here present is based o the rates and prices quoted and collected by the company for its project. It does not make differences for the quality variances as compony produces the variety of concrete quality and other services therefor the calculation and result presented here are the representation of only main product. Note2: We also assume that all other chain function, such as marketing and distribution. Note3: We also assume that all quantity produce during the six months starting from july-2010 to December -2010. Therefor all direct material are purchased and used in the same budget period and there is no direct material inventory at either the beginning or the end of the period.
17

Gammon India Limited three variable cost categories. The budgeted variable cost per cubic meter of concrete for standard concrete mix are as follows: Cost Category Direct Material Cost Direct Manufacturing Labour cost Production Overheads Total Variable Cost Variable Cost Per Cubic Metere 61% 22% 4% 87%

The number of cubic meter is the cost driver for the direct material, Direct manufacturing overheads, and production overheads. The relevant cost of driver is from 0-20000 cubic meter concrete production in the month of july-2010 Budgeted and actual data for the july-2010 are as follows: Budgeted selling price Budgeted production and sales Actual production and sales Fixed cost for 0-20000 Range 2000 Rs. Per Cubic Meter 20000 Cubic Meter 16000 Cubic Meter 1600000 Rs.

Level 1 Analysis
A Actual Result (1) Static Budget Variance (2)=(1)-(3) Production (cub.mtr) Revenues 32000000 8000000(U) 40000000
18

Static Budget (3)

16000

4000(U)

20000

Variable Cost Direct Material Direct Manufacturing Lobour Variable Manufacturing Overheads Total Variable 91% Cost Construction Margin Fixed Cost Operating Income 1600000 1280000 0 2320000(U) 1600000 3600000 2880000 2320000(U) 5200000 29120000 5680000(F) 34800000 87% 3% 960000 640000(F) 1600000 (4%) 23% 7360000 1440000(F) 8800000 (22%) 65% 20800000 3600000(F) 24400000 61%

Rs.2320000 U Static Budget Variances

F=Favorable effect on operating income; U=unfavorable effect on operating income; Budgeted Contribution Margin:-5200000/40000000=13% Actual Contribution Margin:- 2880000/32000000=9% Budgeted Operating Income:- 360000/40000000=9% Actual Operating Income:-1280000/32000000=4%
19

Loss of Revenue, Contribution, and Operating Profit in Year Projection for the loss es at the rates presented above amount in rupees Budgeted Production Revenue Expenses 240000 480000000 417600000 Actual 192000 384000000 368640000 Difference 48000 96000000 48960000 Remark Less Sale Less Revenue High Proportion Contribution 62400000 15360000 47040000 Less contribution Operating Income 43200000 15360000 27840000 Less Profit

Result: 1. Rs.27840000 Loss in one year. 2. Increase in Contract Time Period due to less production. Extra Time to recover the less production will be: Extra Time: 48000/14000=3.42 Months 3. Increase in Time will result more increase in fixed cost amounting to rs. Fixed Cost Increase=1600000*4 Months=6400000Rs.

The static budget or master budget is based on the level of output planned at the start of the budget period. The master budget is called a static budget because the budget for the period is developed around a single (static) planned output.

20

FLEXIBLE BUDGET VARIANCES AND SALES VOLUME VARIANCES

A flexible budget calculates budgeted revenue and budgeted cost based on the actual output in the budgeted period. The flexible budget is prepared at the end of the period, After the actual production known. The flexible budget is the Hypothetical budget that present to prepare the next correct forecast.

Given Data For Analysis of Level 2 Variance Calculation

The budgeted selling price is the same Rs. 2000 per cubic meter of concrete The budgeted variable cost are same The budgeted fixed cost is also same The only difference between the static budget and flexible budget is that static budget is prepared for the planned output of 20000 cubic meter of concrete, where as the flexible budget is based on the actual output of 16000 cubic meter concrete. The static budget I being flexed or adjusted from 20000 production to 10000 production. The flexible budget for 1000 production assume that all cot are either completely variable or completely fixed with respect to the number of concrete production. Preparation of Flexible budget takes following three steps:1. Identify Actual Quantity of Output 2. Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output. Flexible Budget Variable:Rs.2000*20000 Cubic Meter =Rs. 40000000 3. Calculate the flexible budget for cost based on the budgeted variable cost per unit , Actual quantity of output and budgeted fixed cost.
21

Flexible Variable Cost Flexible Budget Variable Cost: Direct Material((2000*61%)*20000) Direct Material Labor(2000*22%)*20000) Variable manufacturing overhead Total flexible budget variable cost Flexible budget fixed cost Flexible budget total cost Amount (Rs.) 24400000 8800000 1600000 34800000 1600000 36400000

Level 2 Analysis
Actual Flexible Flexible Budget (3) Sales Volume Variances (4)=(3)-(5) 16000 4000 20000 Static Budget Result (1) Budget Variances (2)=(1)-(3) Production (cub.mtr) Revenues Variable Cost Direct Material Direct Manufacturing Labor Variable Manufacturing Overhead Total Variable Cost
22

16000

32000000 0

32000000 8000000

40000000

20800000 1280000(U) 65% 7360000 320000(U)

19520000 4880000(F) 7040000 1760000(F)

24400000 61% 8800000 22%

23%

960000

320000(F)

1280000

320000(F)

1600000

4%

3%

29120000 1280000(U)

27840000 69600000(F) 34800000 87%

Contribution Margin Fixed Cost Operating Income

91%

2880000

1280000(U)

4160000

1040000(U)

5200000

1600000 1280000

0 2864000(U)

1600000 4144000

1600000 544000

1600000 3600000

Flexible Budget Variances Rs. 2864000

Static Volume Variances Rs. 544000

Static Budget Variances Rs.2320000

Sales Volume Variances: Sales Budget Variance for Operating Income : =Flexible Budget amount Static Budget Amount =4144000-3600000 =544000 Rs. Unfavorable Therefor could be one or more reason for the above unfavorable variances that could be: The overall demand for the concrete is not at the rate that was anticipated. Budgeted production volume were set without careful analysis of market contribution. Variable cost may not be forecasted with accurate increment. Less efficiency may be used at working. Efforts may not be utilized to its forecasted level.
23

Price Variances:
The formula for computing the price variances is: Price Variance=(Actual price of input-budgeted price of input)*Actual quantity of input

Direct Material Variances

=(1300-1220)*16000 =320000 Rs. Unfavorable Variable Manufacturing Overheads price Variances =(60-80)*16000 =320000Rs. Faborable

Total Price Variances

Direct Material Price Variances Direct Manufacturing Labor Price Variances Variable Manufacturing Overheads Price Variance Total Price Variances (Unfavorable) +1280000 -1280000 -320000 +320000

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Findings from the study:

By identifying progress from a preceding position we are better informed regarding the effects of our actions and have a clearer understanding of the effect of any future action we take. Knowing how much is being spent each month enables a manager to consider whether action needs to be taken to spend more or less in the future. THIS PROCESS IS ONLY WORTHWHILE IF THE BUDGET IS REALISTIC. ANALYSING

VARIANCES AGAINST AN UNREALISTIC BUDGET IS POINTLESS. However, in a well run organisation the comparison between actual and budget is used as the basis for deciding the appropriate action.

This study sets out how the analysis is used to maximum effect. The process is really part of the normal control process.

WHAT CAUSES BUDGET VARIANCES?

There are four key reasons and it is important that good managers recognise the differences, because the action required is may be completely different in each case.

The four reasons are:

1. Faulty Arithmetic in the Budget Figures 2. Errors in the Arithmetic of the Actual Results 3. Reality is Wrong 4. Differences between Budget Assumptions and Actual Outcome Each of these will be examined in turn.

25

Faulty Arithmetic in the Budget Figures It is perfectly possible to have an error in the budget. This includes errors of commission or duplication as well as pure arithmetic. One action is to make a note to ensure it does not happen again when the next budget is being done. Other action depends on the error. Assume the budget stated no overdraft would necessary and it now appears one is required because the sales forecast was used to predict cash inflows rather than the debtor payments. There are two options: Go to the bank and ask for an overdraft, or take some other action to improve cashflow to stay within the budget cash figure. The original budget numbers will need to be changed to reflect the new circumstances and future reporting should be against the revised budget (often called a reforecast or latest estimate.) Action is required but it may not be within the area where the error was made. AVOID: "There's a hole in the roof but we can't fix it because we haven't got a budget for repairs!!!" Errors in the Arithmetic of the Actual Results It is perfectly possible for the actual results to be reported wrongly. This includes the use of the wrong category, omission of costs, double counting of income etc. One well known way of staying within budget is to throw away any invoices received from suppliers, or charge them to someone else's account code. This sort of deliberate action makes a nonsense of budgetary control and must be avoided. The corrective action once this is discovered is to prevent it happening again. Improvements in management education and/or control procedures are recommended. One extra consideration is that in order to correct the error the cumulative results will need to be corrected. This means either putting through a correction in the next period, which will then also be wrong, or adjusting the past results to correct the error. Failing to note that the correction can cause misleading results can lead to wrong decisions being made. AVOID: "The Accounts
26

figures are always different from ours so we ignore them and keep our own records."

Reality is Wrong Sometimes the Actual results are useless as an indicator. A strike or natural disaster will have an impact on results. This does not mean that the budget process in future should include an allowance for this happening again. (However in large organisations it is normal to allow for the impact of a disaster centrally as a contingency even if it is not budgeted at operating unit level.) If necessary, insurance should be taken out. If business is disrupted for two weeks, then it is pointless to compare the remaining two weeks of the month against a full month's budget. Produce a realistic budget for only two weeks and compare against that to establish true performance under normal circumstances. AVOID: fault." "The variances are distorted because of.......so its not my

Differences between Budget Assumptions and Actual Outcome This is the key issue and the one which involves the use of variance analysis techniques. Remember that all budgets contain errors in the assumptions. No one knows the future outcome for certain. The important thing is not to apportion blame by looking backwards, but to look forwards and take action to improve the future in the light of experience. The action to be taken depends on the circumstances. However, punishing deviation from budget is the best way of destroying the budget process. Managers will spend up to budget, conceal data, make the actual fit the budget in order to avoid blame. This is particularly true in large multi-national organisations. The emphasis must be on what can we do about it, rather than why the results are different

27

Multiple causes of variances

Managers must not interpreate variances in isolation of each other. The causes of variances in one part of the value chain can be the result of decision made in another part of the value chain.

1. Poor design of the product and processes

2. Poor work on the production line because of underskilled workers or faulty machines.

3. Inappropriate assignment of labor or machines to specific jobs.

4. Congestion due to schedule a large nember of rush orders .

5. Different quality products.

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Suggestions:
In construction project operation, often there is a project cost variance in terms of the material, equipments, manpower, subcontractor, overhead cost, and general condition. Material is the main component in construction projects. Therefore, if the material management is not properly managed it will create a project cost variance. Project cost can be controlled by taking corrective actions towards the cost variance. The objective of this research paper is to identify the main cause of the cost variance and to recommend the corrective actions. The approach to serve that objective is by conducting surveys to high rise building construction projects in order to identify the cause of project cost variance in material purchasing, and by interviewing experts in order to obtain recommendations in taking corrective actions. Method Analysis used in this research is Delphi method. The result of the research shows that the corrective action towards the variance of the material purchasing cost is actually a preventive action (before process).

The competitive business nowadays especially in construction industry, demands the increasing quality of construction service companies. There are some steps that can be done to improve that quality, for instance, by taking corrective actions in the construction project operation. Those corrective action in the operation phase could be a Project Control system, consist of cost, quality and time. Control of the project cost consists of material cost control, equipments, manpower, subcontractor, overhead cost and general condition. In construction project operation, often there is a project cost variance. One of the most influencing variables in project cost variance is material. Generally, in construction projects, material and equipment are the two major components, which is about 50-60% of the total project cost

29

It is found that material cost mostly could spend 60% of the total construction project cost, but this matter is often neglected. As a comparison, in manufacturing, material management cost at that time is budgeted 1% from the total project cost, while in construction; it is only budgeted 0.15%. Because of the ineffective material management at that time, therefore in some cases of office building construction, it causes the increasing amount of time or work delay up to 18% of the expected time, creating a cost variance. Project cost can be controlled by taking corrective actions towards the cost variance. Materials management is defined as a management system that is required in planning and controlling the quality & quantity of the material, punctual equipment placement, good price and the right quantity as required. Three important phases that holds the key to a successful materials management are; materials purchasing, materials usage, waste controlling and storage. Cost control is not only to supervise the cost & data from the field, but also to analyze the data to make a corrective action before it is too late. Corrective action needs the ability to make a decision of what steps to be done, to make priority of how to correct the problems, etc. This paper discusses about the main problem of the variance of cost construction materials management and to recommend corrective actions towards that variance. The scope of this research is limited to the variance of the construction work at power Plant at Tiroda. Recommended corrective actions for the material Cost Variance Sr. no. Cost Variance Cause Corrective Action

Planning and Scheduling 1 Poor forecasting of field condition, weather and event in the future
30

Conducting detailed and perfect surveys towards the field condition and previous weather data

Poor planning in scope of work

Accurately study the job items, sequences and methods of the job activities Prepare a detailed materials schedule planning in accordance with scope of work

Poor material scheduling (inaccuracy)

Poor estimation and budgeting of materials cost

Prepare an accurate and detailed budgeting based on direct market surveys

Poor development

Evaluate

the

available

standard

method

in

and application of the accordance with the scope of work, situation, standard work procedure 6 Poor market prediction 7 Poor data and information of activity and materials Conduct a pre survey in accordance with market to enable making the right price estimation Conduct data acquisition to make a good and complete data & information condition and environment

Organization & Personnel

1 Lack of support from head office 2 Lack of funds Employ a correct procedure and apply the procedure with high level of discipline. Optimize cash flow in accordance with the requirements. 3 Ineffective communication system 4 Inefficient system procedure and Routine evaluation of all procedures to adjust procedures effectiveness and efficiency
31

Planning and applying Management Information System (MIS)

bureaucracy 5 Poor decision making Conduct routine/regular coordination meeting and process 6 poor coordination of functions in project organization 7 Wrong placement of personnel in project develop a procedure regarding decision making. Develop a good, simple and easy to understand system to regulate coordination procedures and responsibility of units. Conduct proper Personnel selection for the position needed based on comprehensive work experience

organization structure and training check and relevant skill tests. 8 Poor interpersonal communication ability Develop an excellent and effective communication system that has a fix procedure.

Procurement
1 Scarcity of materials in the market Utilize material optimization/material substitution and adjust price accordingly based on the material selected. 2 Changes of materials source condition towards the project location 3 Deviation of quality materials purchased and ordered 4 Delay of materials payment 5 Changes of the company purchasing
32

Propose Material substitution or Material Price adjustment.

All clauses regarding procurement must clearly define the responsibilities, rights and penalties.

Develop an excellent payment schedule to prevent delay in material delivery. Develop fixed procedure

policy 6 Deviation of scheduling 7 Poor purchasing strategy in selecting vendors Develop detailed and accurate schedule to facilitate easy and controlled scheduled execution. Conduct comprehensive and careful selection of suppliers, which consider supplier daily capacity and material quality.

Delivery
1 Delay of materials shipment to location 2 Changes of materials condition during shipment process 3 Shipping cost variance 4 Poor accessibility during shipping process Delivery cost is determined based on budget requirements. Must have proper temporary storage facilities. Procurement Schedule (including delivery) must be routinely monitored Must have material maintenance procedure during procurement/delivery.

Storage and Storage Facilities

1 High number of stealing in warehouses 2 High potency of fire in warehouses 3 Delay of posting in inventory system 4 Overstocking materials in Provide the necessary equipments for storage fire safety and provide training for safety personnel. Create Storage and facility management, material maintenance procedure and discipline storage unit. Create Storage and facility management, material maintenance procedure and discipline storage unit.
33

Provide state of the art security system to support competent and honest security personnel.

warehouses 5 High number of materials damage in warehouses 6 Poor supervision in warehouses Conduct periodic storage control. Create good storage system conform to warehouse standards for material storing.

Usage
1 Inefficient usage of materials in location 2 High frequent materials movement 3 Frequent rework due to mistakes 4 Lack of understanding towards the characteristic of work location 5 Lack of transportation 6 Inefficient utilization and cutting of materials 7 Wrong materials utilization Provide clear work method with available facilities Provide accurate estimation for mobile equipment plan and placement schedule Provide bar bending/ cutting schedule Develop effective material usage procedure and material usage control Develop accurate material transfer method and

adequate temporary facilities site Clear design with good material plan contents and according to scope of work Environmental and site evaluation sequence

Change Order
1 Incomplete drawing Develop evaluation during tender explanation
34

design 2 Frequent out-ofsequence job flow 3 Schedule compression 4 Owner intervention during process

meeting Provide accurate and detail execution schedule

Perform work according to schedule and identify change of order and adjust accordingly to schedule. Clear and well defined clauses in contract regarding responsibilities and duties to prevent unnecessary disruption.

Monitoring and Control

1 Lack of coordination meeting in the field 2 Poor report system Develop procedure and execute the procedure with discipline. 3 Lack of Information Poor companys administration and documentation system 5 Poor evaluation and decision making system 6 Poor inventory Create a procedure and implement the procedure Conduct coordination meeting for project evaluation to reach effective and accurate decision making. Develop appropriate Information system with proper Operation that regulate Coordination meeting

System role (MIS-IT) communication procedure. 4 Provide Manual and procedure that govern

administration and documentation.

control towards stock with discipline. of materials

External Factors
1 High number of Well Implementation of Safety and security system
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materials and equipment loss/stealin 2 Frequent changes of economic condition 3 Frequent changes of rules and regulations 4 High frequent of unpredictable situations during construction (force majeure, natural disaster, politics, etc) 5 Poor condition of weather and climate 6 High competition

and discipline in material utilization

Periodic evaluation of project. Create addendum to minimize losses and impact from planning if needed. Make contract changes with binding condition and according to the applicable agreement. Include force majeure clausal in contract to predict and anticipate unexpected conditions.

Apply accurate construction method

Improve effectiveness, efficiency and productivity by implementing SWOT analysis.

CONCLUSION Corrective actions are applied to the causes of variance by observing the risk factor, both the highest and lowest risk factors, in an effort to prevent deviation in material management. Comprehensive understanding of field issues and problems are required before giving corrective actions recommendation. That way, the effect due to the cost variance can be presented in detail and according to the real condition. Experts recommended corrective actions are corrective actions taken from past events. These actions are preventive actions. Research shows that the cause of material cost

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variance, risk ranking and recommended corrective actions can be organized into a knowledge base which can be developed into a computerized knowledge base management system. This prototype knowledge base management system will yield output in terms of recommended corrective action to cost variance. Recommendation will depend on factors which have the highest risk ranking. Corrective actions towards the cause of variance are recommended by observing the risk level of material cost variance.

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LIMITATIONS ON THE COMMON VARIANCES

(1) There are specific physical circumstances that distinguish the project site from its surroundings.

(2)

These unique circumstances would create an unnecessary hardship for the Contracting firm if the usual standards were imposed.

(3)

Variances are only for use in unusual, individual circumstances.

(4)

Furthermore, consideration of a variance must focus upon the contractual standard.

(5)

Conditions must be imposed on a variance when necessary to avoid a particular variance to be included or not to be included in calculations.

(6)

A variance does not change the quality of the contractual

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Conclusion:
Managers realize that a standard is not a single measure but rather a range of possible acceptable input quantities , costs, output, quantities,or prices. Consequantly ,they expect small variances to arise. A variance withinan acceptable range is considered to be an in control occurrences and calls for no investigation or action by managers. So when would manager need to investigate variances? Frequently , managers investigate variances based on subjective judgements or rules of thumbs. For critical items,such as productdefects even a small variances may prompt investigation and actions. For other items , such as direct material costs ,labor costs and repair cost , companies generally have rules such as investigate all variances exceeding rs.50000 or 25% of budgeted cost, whichever is lower.

Performance Measurement Using Variances

Managers often use variance analysis when evaluating the performance of their subordinates. Two attributes of performance are commonly evaluated:

1. Effectiveness : the degree to which predermined objective or target is met for example , sales,customers satisfaction and quality

2. Efficiency: The relative amount of input used to achieve a given output level the smaller the quantity of input used to make a given number of cell phones or the greater the number of cell phones made from a given quantity of input , the greater the efficiency. As we discussed earlier , managers must be sure they understand the causes of a variance before using it for performance evaluation. Suppose a purchasing manager
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has just negotiated a deal that result in a favourable variance for any or all of the following reasons: 1. The purchasing manager bargained effectively with suppliers.

2. The purchasing managers secured a discount for buying in bulk with fewer purchase orders. However ,buying larger quantities than necessary for the short run resulted in excessive inventory.

3. The purchasing manager accepted a bid from the lowest priced supplier after only minimal efforts to check quality amid concerns about the suppliers material. Managers benefits from variances analysis because it highlights individual aspects of performance. However , if any single performance measure (for example, a lobor efficiency variance or a consumer rating report) receives excessive emphasis , managers will tend to make decision that will cause the particular performance measure to look good. These actions may conflict with the companys overall goals, inhibiting the goals from being achieved . This faulty perspective on performance is usually arises when top management designs a performance evaluation and reward system that does not emphasize total company objectives.

Organizational Learning

The goal of variance analysis is for managers to understand why variance arises, to learn and to improve future performance. For instance , to reduce the unfavorable direct material efficiency variances , managers may seeks improvements in product design , in the commitment of workers to do the job right the first time, and in the
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quality of supplied materials, among other improvements. Sometime an unfavorable direct material efficiency variance may signal a need to change product strategy, perhaps because the product can not be made at a low enough cost. Variance analysis should not be a tool to play the blame game (that is, seeking a person to blame for every unfavorable variance) . Rather it should help the company learn about what happened and how to perform better in the future. Managers need to strike a delicate balance between the two uses of variances we have discussed : performance evaluation and organizational learning. Variances analysis is helpful for performance evaluation but an overemphasis on performance evaluation and meeting individual variance targets can undermine learning and continuous improvement. Why? ? Because achieving the standard becomes an end in and of itself. As a result , managers will seek targets that are easy to attain rather than that are challenging and that require creativity and resourcefulness. For example, if performance evaluation is overemphasized , manager will prefer an easy standard that allows worker ample time to manufacture a product; he will then have little incentive to improve processes and methods to reduce manufacturing time and cost. An overemphasis on performance evaluation may also cause managers to take actions to achieve the budget and void an unfavourable variance, even if such action could hurt the company in the long run. For example, the manufacturing manager may push workers to produce more within the time allowed , even if this action could lead to poorer quality product being produced , which could later hurt revenues. Such negative impacts are less likely to occur if variance analysis is seen as a way of promoting organization learning.

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BIBLIOGRAPHY:
1) Websites: (a) www.gammonindia.com (b) Wikipedia 2) Magazines & Journals 3) Books: (a) Cost Accounting- Charles T. Horngren, Srikant M. Datar, George Foster, Madhav V. Rajan, Christopher Ittner. (Pearson)

(b) Indian Financial System- Vasant Desai

(c) Financial Management- S Rastogi

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