Lesson-27

Labor Cost Variance Analysis

Learning Objectives

• To learn how to calculate labor cost variance

• To learn how to calculate labor efficiency variance
• To learn how to calculate labor rate variance
• To learn how to calculate overhead variance

Terminology

1. SH = Standard Hours
2. SR = Standard Rate per hour
3. AH = Actual Hour
4. AR = Actual Rate per hour
5. RSH = Revised Standard Hour
6. LCV = Labor Cost Variance
7. LRV = Labor Rate Variance
8. LEV = Labor Efficiency Variance
9. LMV = Labor Mix Variance
10. LITV = Labor Idle Time Variance

Problem 1

The information regarding composition and weekly wages rates of labor force engaged in
a particular job is as follows:

Workers Std. No. Std. Rate Actual No. Actual Rate

of Hours per hour of Hours per hour
----------- -------------------- ------------ ---------------- -----------------
Skilled 75 60 70 70
Semi-skilled 45 40 30 50
Unskilled 60 30 80 20

Calculate the following:

• LCV
• LRV
• LEV

Solution

1. Labor Cost Variance (LCV) = (SH x SR) – (AH x AR)

Skilled = (75 x 60) – (70 x 70)

 4500 – 4900 = 400(A)

Semi-skilled = (45 x 40) – (30 x 50) =

1800 – 1500 = 300 F
Unskilled = (60 x 30) – (80 x 20)
1800 – 1600 = 200 F
--------
Total LCV = 100 F
-------

2. LRV = AH (SR – AR)

Skilled = 70 (60 – 70) = 70 x (-10) = 700(A)

Semi-Skill = 30 (40 -50) = 30 x (-10) = 300(A)

Unskilled = 80 (30-20) = 80 x (-10) = 8000(F)

--------
Total LRV = 200 A
---------

3. LEV = SR (SH AH)

Skilled = 60 (75-70) = 60 x 5 = 300 F

Semi-skilled = 40 (45-30) = 40 x 15 = 600 F

Unskilled = 30 (60-80) = 30 x (-20) = 600 A

---------
LEV = 300 (F)
---------

Verification

LCV = LRV + LEV

100 (F) = 200 (A) + 300 (F)
100 (F) = 100 (F)

Problem 2

The budgeted labor force for producing 1000 articles is as follows:

Particulars Total Std. Hours Total Std. Cost

------------- ------------------ -------------------
30 men @ Rs. 40 per hour 1500 600
For 50 hours
20 women @ Rs. 30 per hour 600 1800
For 30 hours

10 boys @ Rs. 20 per hour

For 20 hours 200 40
----- ----
2300 820
------ -----

The actual data for producing 1000 articles is as follows:

25 men @ 45 per hour for 50 hours 1250 562.50

30 women @ 30 per hour for 30 hours 900 270.00

10 boys @ 30 per hour for 15 hours 150 30.00

------ --------
2300 86250
------ --------

Calculate the following:

• LCV
• LRV
• LEV
• LMV

Solution

1. LCV = SH x SR – AH x AR

Men = 1500 x 40 – 1250 x 45 = 3750 F

Women = 600 x 30 – 900 x 30 = 9000 A

Boys = 200 x 20 – 150 x 20 = 1000 F

----------
Total = 4250 (A)
----------
2. LRV = (SR – AR) AH

Men = (40 – 45) 1250 = 6250 A

Women = (30 – 30) 900 = Nil

Boys = (20-20) 150 = nil

 ----------
Total = 6250 (A)
-----------
3. LEV = (SH – AH) SR

Men = (1500 – 1250) 40 = 1000 (F)

Women = (600 – 900) 30 = 900 (A)
Boys = (200 –150) 20 = 100 F
----------
Total = 6250 (A)
-----------
4. LMV = (RSH –AH) SR

Note

The revised standard proportions are same as standard hour because the actual total hours
are equal to the total standard hours. Hence, there is no mix variance.

Problem 3

The standard labor hours and the rate for production of an article are as follows:

Particulars Hour Rate per hour Total

Skilled 5 15.00 75.00

Unskilled 8 5 40.000

Semi-skilled 4 7.50 30.00

----- --------
17 145.00
------ ---------

The actual data for 1000 units is as follows:

Skilled 4500 20.00 90.00

Unskilled 10,000 4.50 45.000

Semi-skilled 4200 7.50 31.500

-------- --------
18.700 1,66,500
--------- -----------

Calculate the following:

• LCV
 • LRV
• LEV
• LMV

Solution

1. LCV = (SH x SR) – (AH x AR)

Skilled = 500 x 15 - 4500 x 20 = 75000 – 90000 = 15,000 (A)

Unskilled = (8,000 x 5) – (10.000 x 45) = 40,000 – 45.000 = 5000 (A)

Semi-skilled = (4,000 x 750) = 31,500 = 1500 (A)

--------
21,500
--------
2. LRV = (SR – AR) AH

Skilled = (15-20) 4500 = 22,500 (A)

Unskilled = (750-750) 4200 = Nil

Semi-skilled = (50- 450) 1000 = 500 (F)

--------
22.000 (A)
-----------
3. LEV = (SH – AH) SR

Skilled = (5000-5500) 15 = 7500 (A)

Unskilled = (8000-8800) 5 = 4000 (A)

Semi-skilled = (4000- 4400) 75 = 300 (A)

--------
22.000 (A)
-----------
4. LMV

For calculating labor variance mix, one has to calculate revised standard mix
because standard labor and total actual labor are different.

LMV = (RSH – AH) SR

RSH = 5000
Skilled ------- X 18700 = 5500
17000
 Unskilled = 8000
------ X 18700 = 8800
17000
Semi-skilled = 4000
------ X 18700 = 4400
17000

LMV

Skilled = (5500– 4500) 15 = 15000 (F)

Unskilled = (10.000– 8800) 5 = 6000 (A)

Semi-skilled = (4400– 4200) 7.5 = 1500 (G)

------------
10500 (F)
------------
Working Notes

The calculation of standard hours for actual products is as follows:

For 1 unit = 5 hours

Skilled = 1000 units x 5 hours = 5000 hours

Unskilled = 1000 units x 8 hours = 8000 hours

Semi-skilled = 1000 units x 4 hours = 4000 hours

---------------
17,000 hours
---------------
Overhead Variance

Problem

Calculate the following overhead variances:

Particulars Budget Actual

Output in units 12.000 14.000

No. of working days 20 22

Fixed overheads 36.000 49.000

Variable overheads 24.000 35.000

There was an increase of 5% in capacity.

Solution

First, calculate the standard fixed overhead rate per unit as follows:

Standard fixed overhead rate = 36.000

-------- = 3 per unit
12.000 units
Standard variable overhead rate = 24100
--------- = 2 per unit
12.000
1. Total overhead cost variance =

(Actual output x 9 standard rate) – Actual overhead

14000 x (3+2) – (49.000+35…)

70.000 - 84.000 = 14000(A)

2. Variable overheads variance = (Actual output x standard variable overhead rate) –
(Actual variance overhead)

= 14000 x 2– 35.000 = 28000-35.000 = 7000(A)

3. Fixed overhead variance

(Actual output x standard fixed overhead rate) = Actual overhead
14000 x 3 – 49.000 = 42.00 = 7000(A)

4. Expenditure variance = (Budget fixed overhead) – (Actual fixed overhead)

= 36.000 – 49.000 = 13000(A)

5. Volume variance = Actual output x standard rate–budgeted fixed overhead rate

= (14000 x 3) – (36.000)

= 42.000 – 36.000 = 6.000(F)

6. Capacity variance = Standard rate (revised budget units – budget units)

Budgeted units for 20 days = 12.000

Budgeted units for 22 days = 12.000 x 22

--------------- = 13.200
20
 Revised budget units = 13.200 + (13,200 + 5) (After an increase of 5% capacity)
-------------------------------------------------
100
= 13.200 + 660 = 13.860

Capacity variance = 3(13860 – 13200) = 1980 (F)

7. Calendar variance = Change in number of units by change in actual and

standard number of days x standard rate

Change in number of days = 2

Increase in units in 2 days = 12.000 x 2 = 1200

------------
20
Calendar variance = 1200 x 3 = 3600 (F)

8. Efficiency variance = Standard rate (actual quantity – revised budgeted units)

= 3 (14.000 – 13.860)
= 3 (140)
= 420 (F)

Exercise

1. The standard cost of a chemical mixture is as follows:

• 8 tons of material A at Rs.40 per ton

• 12 tons of material B at Rs. 60 per ton
• Standard yield is 90% of input

The actual cost for a period is as follows:

• 10 tons of material A at Rs. 30 per ton

• 20 tons of material B at Rs. 68 per ton
• Actual yield is 26.5 tons

Compute the variances of all materials.

2. The standard material cost of 100 kgs of chemical D is as follows:

• Chemical a A-- 30 kgs @ Rs. 4 per kg

• Chemical a B-- 40 kgs @ Rs. 5 per kg
• Chemical a C-- 80 kgs @ Rs. 6 per kg

In a batch, 500 kgs of chemical D was produced from a mix of the following:
 • Chemical a A-- 140 kgs at a cost of Rs. 588
• Chemical a B-- 220 kgs at a cost of Rs. 1,056
• Chemical a C-- 440 kgs at a cost of Rs. 2,860

Calculate all variances.

3. AB Ltd. has established the following standard mix for producing nine gallons of product
A:
Rs.
5 gallons of material X at Rs. 7 per gallon = 35
3 gallons of material Y at Rs. 5 per gallon = 15
2 gallons of material Z at Rs. 2 per gallon = 4
-------
54

A standard loss of 10% of input is expected to occur. The actual input was as follows:

• 53,000 gallons of material X at Rs. 7 per gallon

• 28,000 gallons of material Y at Rs. 5.30 per gallon
• 19,000 gallons of material Z at Rs. 2.20 per gallon
• The actual output for a period was 92,700 gallons of product A

Compute all material variances.

4. A gang of workers usually consists of 10 men, 5 women and 5 boys in a factory. They
are paid at standard hourly rates of Rs. 1.25, Re. 0.80 and Re. 0.70 respectively. In a
normal working week of 40 hours, the gang is expected to produce 1,000 units of output.

In a certain week, the gang consisted of 13 men, 4 women and 3 boys. The actual wages
were paid at the rates of Rs.1.20, 0.85 and Re. 0.65 respectively. Two hours per week
were lost due to abnormal idle time and 960 units of output were produced. Calculate the
various labor variances.

5. A factory operates a system of standard costs for a given four-week period budgeted for
production of 2,000 units. The actual production was 1,800 units. The costs relating to
that period were as follows:

Standard Actual
(Rs.) (Rs.)
Fixed overheads 80,000 74,000
Variable overhead 40,000 38,000
Semi-variable overheads 15,000 14,700

Semi-variable overheads are 60% fixed and 40% variable.

Prepare a variance statement to be presented before the management.