Friday, 12 July 2013

Labour Variances

Standard Costing- Labour Variances
Direct Labour Cost Variance:
         Due to the difference between the standard cost of direct labour which has been specified for the achieved production & the actual direct wage that has been incurred, direct labour cost variance arises.
The formula is:
Standard Cost – Actual Cost
         Analysis of labour variances also, like material variance, can be done into two components, viz., direct labour rate variance & direct labour efficiency variance.
Labour Rate Variance:
         The difference between the standard rate & the actual rate of pay, multiplied by the actual hours worked is known as labour rate variance.
The formula is:
Actual hours worked * Rate difference
Or, Actual hours worked * (Standard rate – Actual rate)
Or, (Actual hours worked * Standard rate) – (Actual hours worked * Actual rate)
Or, Standard rate of actual hours worked – Actual cost
Reasons of occurrence of Labour rate variance:
  1. Using labours that are different in grades from those who are in the technical specification.
  2. During seasonal or emergency, using rates which are above or below the standard rate.
  3. Paying to workers who are unable to earn established piece rates; day rates which are guaranteed.
  4. Standard rates which are established are not paid to the new workers.
  5. Supervisor’s having personal favoritism but without proper authority, towards promoting employees to higher grades & rates.
Labour Efficiency Variance:
          When there is a difference between actual efficiency & the expected efficiency, the labour efficiency variances occurs & the calculation of the same is done as the difference between the actual hours that has been worked & the actual hours that should have been worked for producing the actual output (i.e. standard hours of actual output), multiplied by the standard rate.
The formula is:

Standard Rate * Hours difference
Or, Standard Rate * (Standard hours of actual output – Actual output)
Or, (Standard rate * Standard hours) – (Standard rate * Actual hours)
Or, Standard cost of standard hours – Standard cost of actual hours
Reasons of occurrence of Labour efficiency variance:
  1. There is a change in the method of production.
  2. More efficient machinery has been purchased.
  3. There is a breakdown in the machine.
  4. Spoiled work is corrected.
  5. Materials & suitable machines are not available.
  6. The efficiency or non efficiency of the direct workers who are engaged on production.
Relationship between the variances:
         Total labour cost variance = Rate variance + Efficiency variance
Illustration 1: For a particular job, the data are given below:
Standard hours                                                                                    150 hours
Standard rate of wages per hour                                                         $ 5
Actual hours                                                                                        100 hours
Actual rate of wages per hour                                                             $ 6
         Calculate: (a) Labour cost variance; (b) Labour rate variance; & (c) Labour efficiency variance.
(a) Labour Cost variance: Standard Cost – Actual Cost
                                                (150 * $ 5) – (100 * $ 6)                     150 Favourable
(b) Labour Rate variance: Actual hours * (Standard rate – Actual rate)
                                                100 * (5-6)                                          100 Adverse
(c) Labour Efficiency variance: Standard rate * (Standard hours – Actual hours)   
                                                5 * (150 -100)                                     250 Favorable
Check: Labour Cost Variance = Rate + Efficiency                  150 Favorable
Illustration 2:
          A single product which passes through two operating departments is produced by a company. The following data are shown by the standard cost card for the product:
                                    Standard rate ($)         Standard time (hours)             Total ($)
Department M                         2.70                             1.1                               2.97
Department N                         3.00                             0.80                             2.40
For the current month, the production is 4000 units. In the two departments, the actual labour costs are as follows:                       
                                                                        Hours                                      Cost ($)
Department M                                                 4000                                        12908
Department N                                                 3600                                        10200
         Find the labour cost, labour rate & labour efficiency variances.
Standard hours required to produce 4000 units:
Department M                         4000 units * 1.1 hours                                     4400 hours
Department N                         4000 units * 0.80 hours                                   3200 hours
                                                                                                                        7600 hours
Standard Labour cost:                                                                                        $    
Department M                         4400 hours @ $ 2.70                                       11880
Department N                         3200 hours @ $ 3.00                                         9600
Actual Labour cost:
Department M                                                                                                 12908
Department N                                                                                                 10200   

Labour Cost Variance: Standard cost – Actual cost
                                    $ 21480 - $ 23108                                                       1628 Adverse
Labour Rate Variance: (Actual hours * Standard Rate) – Actual Cost
Department M             (4000 * 2.70)   - 12908            2108 Adverse
Department N             (3600 * 3.00) – 10200             600 Favourable
                                                                                    1508 Adverse              1508 Adverse
Labour Efficiency Variance: Standard Cost – (Actual hours * Standard rate)
Department M             11880 - (4000  * 2.70)             1080 Favourable
Department N               9600 - (3600 * 3.00)              1200 Adverse
                                                                                      120 Adverse              120 Adverse
Check: Labour Cost Variance = Rate + Efficiency                                      1628 Adverse
Idle Time Variance:
         The calculation of an idle time variances is done when due to abnormal circumstances such as lock-outs, strikes, breakdown of machines, shortage of materials, failure of power etc., there is wastage of time. The segregation of the variance which has been occurred as a result of abnormal wastage of time from the efficiency variance can be done because the time lost has not been occurred as a result of lack of efficiency of employees.
         The standard cost of actual hours of idleness which occurred as a result of abnormal circumstances is represented by idle time variance. The variance is always adverse as a result of which investigating the cause of abnormal idle time becomes necessary. The formula is:
Standard rate * Hours of idle time
         On the basis of actual hours that have been worked, the calculation of efficiency variance shall be done & on the basis of actual hours attended, the calculation of labour rate variance shall be done.
         The further analysis can be done of the efficiency variance into direct labour mix (or gang composition) variance & direct labour revised efficiency variance, in the cases where different grades of direct labour are employed.
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