*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:*- Using labours that are different in grades from those who are in the technical specification.
- During seasonal or emergency, using rates which are above or below the standard rate.
- Paying to workers who are unable to earn established piece rates; day rates which are guaranteed.
- Standard rates which are established are not paid to the new workers.
- 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:*- There is a change in the method of production.
- More efficient machinery has been purchased.
- There is a breakdown in the machine.
- Spoiled work is corrected.
- Materials & suitable machines are not available.
- 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***For a particular job, the data are given below:**

__Illustration 1:__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.

__Solution:__(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.

__Solution:____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__

__21480__

__Actual Labour cost:__

Department M 12908

Department N

__10200__

__23108__

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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