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Labor Cost Variance Analysis
Labor Cost Variance Analysis
Learning Objectives
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:
• LCV
• LRV
• LEV
Solution
Verification
Problem 2
• LCV
• LRV
• LEV
• LMV
Solution
1. LCV = SH x SR – AH x AR
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:
Unskilled 8 5 40.000
• LCV
• LRV
• LEV
• LMV
Solution
For calculating labor variance mix, one has to calculate revised standard mix
because standard labor and total actual labor are different.
RSH = 5000
Skilled ------- X 18700 = 5500
17000
Unskilled = 8000
------ X 18700 = 8800
17000
Semi-skilled = 4000
------ X 18700 = 4400
17000
LMV
Problem
Solution
First, calculate the standard fixed overhead rate per unit as follows:
= (14000 x 3) – (36.000)
Exercise
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
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:
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