Labour Cost- 1

Prepared By
Shuba. N, Assistant Professor, Department of Commerce,
Gfgc, Bidadi
 Labour Variances:
The labour directly engaged in the production of a product is known as direct
labour. The wages paid to such labour is known as direct wages. Labour
variances arise when actual labour costs are different from standard labour cost.
In analysis of labour costs, the emphasis is on labour rates and labour
hours.

Labour Cost Variance

Labour Rate Variance Labour Time Variance Or

(Labour Efficiency Variance)

Labour Idle Time Labour Mix Labour Yield

Variance Variance Variance
 Labour Cost Variance = Standard Labour Cost – Actual Labour Cost or
LCV = Std. cost of actual production – Actual cost
= (Std. hours X Std. Rate) – (Actual hours X Actual rate)
= (SH X SR) – (AH X AR)

Direct Labour Cost Variance is sub-divided into:

1. Labour Rate Variance
2. Labour Efficiency Variance
1. Labour Rate Variance = (Standard Rate – Actual Rate) X Actual Hours

LRV = (SR – AR) X AH

2. Labor Efficiency Variance = (Std hours for actual production – Actual hours worked) X Std Rate

LEV = (SH– AH) X SR

Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance

Hence, LCV = LRV + LEV

Problem: 1
The following information is supplied to you:
Standard time for a month :4000 Hours

Standard wage rate :Rs.2.25 per hour

Number of labourers employed : 30

Average working days in a month : 25
No. of hours a worker works per day : 7 hours

Total wage bill in a month : Rs. 13125

You are required to calculate the following:

a) Labour Cost Variance b)Labour Rate Variance
c) Labour Efficiency Variance
 Solution

Standard time = 4000 hours

Standard wage rate = Rs.2.25
Actual time = 30 workers X 25 days X 7 hours
= 5250 hours
Total Wage bill
Actual Wage Rate = ------------------
Actual time

Rs. 13125
= ----------- = Rs. 2.50
5250 hrs.
a) Labour Cost Variance = Standard Labour Cost – Actual Labour Cost
= (Std. Hours X Std. Rate) – (Actual Hours X Actual Rate)
= (4000 hours X Rs. 2.25) – (5250 hours X Rs. 2.50)
= Rs.9000 – Rs. 13125
= Rs. 4125 (A)
 b) Labour Rate Variance = (Std. Rate – Actual Rate) Actual Hours
= 5250 hours (Rs.2.25 – Rs.2.50)
= 5250 X -0.25
= Rs. 1312.50 (A)

c) Labour Efficiency Variance = (Std. Hours – Actual Hours) Standard Rate

= Rs. 2.25 (4000 hours – 5250 hours)
= Rs.2.25 X -1250 hours
= Rs. 2812.50 (A)

Verification

Direct Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance Rs.

4125 (A) = Rs.1312.50 (A) + Rs.2812.50 (A)

Rs. 4125 (A) = Rs.4125 (A)
Problem: 2
From the following information, calculate direct labour cost variance:
Standard wage rate per hour : Rs. 5
Standard time set : 1000 hours
Actual wage rate per hour : Rs. 6
Actual time taken : 980 hours.

Solution

Direct Labour Cost Variance = (SH X SR) – (AH X AR)

= (1000 X Rs.5) – (980 X Rs.6)
= Rs.5000 – Rs.5880

= Rs.880 (A)
 Labour Rate Variance = (Standard Rate – Actual Rate) X Actual Hours
= (Rs.5 – Rs.6) X 980 Hours
= -Rs.1 X 980 hours
= Rs. 980 (Adverse)

Labour Efficiency Variance

= (Standard hours for actual output – Actual hours) X Standard Rate
= (1000 hours – 980 hours) X Rs.5
= 20 hours X Rs.5
= Rs.100 (Favourable)

Direct Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance

DLCV = LRV + LEV

Rs.880(A) = Rs.980(A) + Rs.100(F)

Rs.880(A) = Rs.880(A)
Labour Rate 1.80 per hour, Std hours 4 hours, Actual production was
as follows:
Units producted : 400 units, labour rate 1.90 per hour, hours
worked 1500. Calculate Labour Variances.
SH= 4 hrs x 400 units = 1600 hours
SR = 1.80
AH = 1500 hours
AR = 1.90
Labour efficiency variance is the responsibility of
Production Manager and is similar to materials usage
variance. Both these variance measure the difference
in performance.

Labour efficiency variance can be further sub-divided

into:
1. Labour Idle Time Variance
2. Labour Mix Variance
3. Labour Yield Variance
1. Labour Idle Time Variance = Idle Hours X Standard Rate
LITV = IH X SR

2.
Labour Mix Variance = (Revised Standard hours – Actual Hours Worked) X
Standard Rate

Symbolically,
LMV = (RSH – AHW) X SR

Where,
RSH = Standard Hours of the 1grade
------------------------------------- X Total Actual Hours Worked

Total Standard Hours

From the following information, calculate labour mix variance:
Standard Actual
Grade A 80 workers @ Rs. 5 per hour 100 workers @ Rs.6 per hour
Grade B 120 workers @ Rs.3 per hour 80 workers @ Rs.2 per hour
200 180

Solution

Labour Mix Variance = (Revised Standard hours – Actual Hours Paid) X Standard Rate

Standard Hours of the grade

Revised Standard Hour = --------------------------------------- X Total Actual Hours Worked
Total Standard Hours

80
RSH for Grade A = ------ X 180 = 72 hours
200

120
RSH for Grade B = -------- X 180 = 108 hours
200

LMV = (RSH – AHP) X SR

Grade A = (72 - 100) X Rs.5 = Rs.140 (A)
Grade B = (108 – 80) X Rs.3 = Rs. 84 (F)
-------------
LMV = Rs. 56 (A)
-------------
 Labour Yield Variance (LYV)

It is similar to Material Yield Variance. It studies the impact of actual yield on labour cost where output
varies from the standard. The formula for LYV is:

Labour Yield Variance

= (Actual yield – Standard yield) X Standard Cost Output
Total Actual Hours
Std. Yield = ----------------------- X Actual Output
Total Standard hours

Total Standard Hours

Standard Output Hours = ------------------

Actual Output

In labour Cost if Total Standard Hours and Total Actual Hours are same,
we solve the problem 1 type and if Total Standard Hours and Total Actual
Hours are different we solve the problem in another type
 Problem 1:

In this Problem they have given 100 units of product were produced, they have not given
standard product produced, so we consider that Standard Output is 100 and Actual Output is 100
 Standard for 100 units Actual for 100 units
Type of Worker Hours Rate Amount Hours Rate Amount
A 3,000 2 6,000 3,200 1.50 4,800
B 2,000 3 6,000 1,900 4.00 7,600
Total 5,000 12,000 5,100 12,400

Solution:
LCV = 12,000 ‐ 12,400 = Rs. 400 (A)
•LRV: (SR ‐ AR) x AH
A = (2 ‐ 1.50) x 3,200 = Rs. 1,600 (F)
B = (3 ‐ 4) x 1,900 = Rs. 1,900 (A)
= Rs. 300 (A)
•LEV: (SH ‐ AH) x SR
A = (3,000 ‐ 3,200) x 2 = Rs. 400 (A)
B = (2,000 ‐ 1,900) x 3 = Rs. 300 (F)
= Rs. 100 (A)
Revised Standard Hours = Std hours of 1 grade/Total Std hours x Actual hours
RSH A = 3000/5000 x 5100 = 3060 hrs
B = 2000/5000 x 5100 = 2040 hrs
SY = Total Actual Qty/Total Std Qty x Actual Output
= 5100/5000 x 100 = 102
Standard Output Cost = Total Standard Amount / Standard output
= 12000/100 =120
LYV = (AY – SY) Std output cost
=(100 – 102) 120
=(-2)120 = 240 (A)
Verification:
LCV= LRV +LMV +LYV
400(A) = 300 (A) + 140(F) + 240(A)
Problem 2:
The details regarding the composition and the weekly wage rates of labour force
engaged on a job scheduled to be completed in 30 weeks are as follows:

Here Standard Output or Yield is 30 weeks and Actual output or Yield is 32 weeks
LYV = (SY – AY) Std output cost
=(30 – 32) 243000/30
=(-2)8100 = 16200 (A)
Verification:
LCV=LRV + LMV +LYV
13000(A) = 6400(A) + 9600 (F) + 16200 (A)
13000(A) = 13000(A)
 Problem 3:

The following information is available from the records of a Company:

Standard wages Actual wages

Skilled : 90 workers @ Rs.2 per hour 80 workers @ Rs.2.50 per hour Unskilled :
60 workers @ Rs.3 per hour 70 workers @ Rs.2 per hour
Budgeted hours : 1000 Actual hours : 900

You are required to calculate the following:

i) Labour Cost Variance
ii) Labour Rate Variance
iii) Labour Efficiency Variance
iv) Labour Mix Variance
v) Labour Yield Variance
Standard output = 1000 hrs and Actual Output =900 hours

Labour Cost Variances = SC – AC

= 360000 – 306000
= 54000 (F)
LRV: (SR ‐ AR) x AH
Skilled = (2 ‐ 2.5 ) x 72000 = Rs. 36000 (A)
Unskilled = (3‐2) x 63000 = Rs. 63,000 (F)
=27000 (F)
Labour Efficiency Variances = (SH – AH) SR
 0

Labour Mix Variance = (Revised Std. Hours – Actual Hours) X Standard Rate
Skilled
= (RSH – AH) X SR
Skilled = (81000 – 72000) X Rs.2 = Rs.18000 (F)
Unskilled = (54000 – 63000) X Rs.3 = Rs.27000 (A)
-----------------
LMV = Rs.9000 (A)
-----------------
Labour Yield Variance = (Actual Yield –Std. Yield) X St. Output cost
Where,
Std. Cost 360000
Std. labour cost output = ------------------ = ----------- = 360
Std. Output 1000

In this problem Std Yield is 1000 and Actual Yield is 900 so formula will be

Labour Yield Variance = (Std. Yield - Actual Yield) X St. Output cost
= ( 1000 – 900 ) 360
= 100 x 360 = 36000 (F)
Problem 4:
 2000 1800

Example: Std hours: Skilled 32 x 40 = 1280

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THANK YOU