STANDARD COSTING & VARIANCE ANALYSIS

Dr. Padmanava Mohapatra

Dated 25/03/2020

Part II

Labour Cost Variance (LCV)

It is the difference between Standard Labour Cost and Actual Labour Cost.
It has two sub-parts,
 Labour Rate Variance (LRV)
 Labour Efficiency Variance (LEV)
Again, the Labour Efficiency Variance has two sub-parts/divisions
 Labour Mix Variance (LMV)
 Labour Yield Variance (LYV)

Computation of Labour Cost Variance

LCV=SLC-ALC
Abbreviations used
SLC : Standard Labour Cost
ALC : Actual Labour Cost
 Variance may be positive or negative.
 Variance arises due to change in labour time and labour rate.

Computation of Labour Rate Variance (LRV)

LRV=AT(SR-AR)
Abbreviations used
AT : Actual Time
SR : Standard Rate
AR : Actual Rate
 Variance may be positive or negative
 Variance arises due to-
a. Change in basic rate
b. Promotion to workers
c. Payment of more overtime
d. Different rates to different workers
Computation of Labour Efficiency Variance (LEV)
LEV=SR(ST-AT)
Abbreviations used
SR : Standard Rate
ST : Standard Time
AT : Actual Time
 Variance may be positive or negative
 Variance arises due to-
a. Lack of proper supervision
b. Defective machineries and equipments
c. Increase in labour turn over
d. Bad working condition
e. Unsatisfactory personnel relation
f. Use of non-standard materials

Exercise 1
Calculate labour variances from the followings-
Wages paid Rs.30,000
Standard hours produced 8,000
Standard rate per hour Rs.3
Actual hours worked 7,500

Solution

ST : 8,000 hrs
AT : 7,500 hrs
SR : Rs.3 p.h.
AR : 30,000/7,500 = Rs.4 p.h.
Labour Cost Variance (LCV)
= SLC-ALC
= 8000 x 3 – 7500 x 4
= 24,000 – 30,000
= 6,000 Adverse
Labour Rate Variance (LRV)
= AT(SR-AR)
= 7,500 (3 - 4)
= 7500 x (-1)
= 7,500 Adverse
Labour Efficiency Variance (LEV)
= SR(ST-AT)
 = 3 (8,000 – 7,500)
= 3 x 500
= 1,500 Favourable
Verification
LCV = LRV + LEV
(-6000) = (-7500) + 1500

Exercise 2
Calculate labour variances-
Types of No. of SR p.h. (Rs.) No. of AR p.h.
Workers workers workers (Rs.)
(Standard) (Actual)
I 50 10.00 60 11.00
II 40 8.00 30 7.00
III 20 5.00 20 4.00

Work is completed in one week of 48 hours.

Solution

Calculation of SLC & ALC

Types of Nos Week Standard SR SLC Nos Week Actual SR ALC
Workers (Std) hrs Gang hrs (Actual) hrs Gang hrs
I 50 48 2400 10 24000 60 48 2880 11 31680
II 40 48 1920 8 15360 30 48 1440 7 10080
III 20 48 960 5 4800 20 48 960 4 3840
Total 5280 44160 5280 45600

Labour Cost Variance (LCV)

= SLC-ALC
= 44160 – 45600
= 1440 Adverse
Labour Rate Variance (LRV)
= AT(SR-AR)
I: =2880(10-11)
= 2880 Adverse
II : =1440(8-7)
=1440 Fav
III : = 960 x (5-4)
=960 Fav
LRV = (-2880) +1440+960=480 Adverse
Labour Efficiency Variance (LEV)
= SR(ST-AT)
I: = 10 (2400 – 2880)
=4800 Adv
II : =8(1920-1440)
=3840 Fav
III : = 5(960-960)
=Nil
LEV =(-4800)+3840 = (-960)

Verification
LCV = LRV + LEV
(-1440) = (-480) + (-960)