Analysis of Variance - Labour Variance

Labour variance

Labour variances can be analyzed as follows:

a) Labour cost variance:

It is the difference between the standard cost of labour allowed (as per standard laid down) for the actual output achieved and the actual cost of labour employed. It is also known as wages variance.

Labour cost variance= standard cost of labour – actual cost of labour.

b) Labour rate variance:

It is that portion of the labour cost variance which arises due to the difference between the standard rate specified and the actual rate paid.

It is calculated as follows:

Rate of pay variance = actual time taken (standard rate – actual rate)

c) Total labour efficiency variance:

It is that part of labour cost variance which arises due to the difference between standard labour cost of standard time for actual output and standard cost of actual time paid for.

It is calculated as follows:

Total labour efficiency variance = standard rate (standard time for actual output – actual time paid for)

d) Labour efficiency variance:

It is that portion of labour cost variance which arises due to the difference between standard labour hours specified for the output achieved and the actual labour hours spent.

Labour efficiency variance = standard rate (standard time for actual output – actual time worked)

e) Labour idle time variance:

It is calculated only when there is abnormal idle time. It is the portion of labour cost variance which is due to the abnormal idle time of workers. While calculating labour efficiency variance abnormal idle time is deducted from actual time expended to ascertain the real efficiency of the workers.

Labour idle time variance is expressed as:

Idle time variance = abnormal idle time x standard rate.

Total labour cost variance = labour rate of pay variance + total labour efficiency variance

f) Labour Mix variance or Gang composition variance:

It is like materials mix variance and is a part of labour efficiency variance. This variance shows to the management as to how much of the labour cost variance is due to the change in the composition of labour force.

It is calculated as follows:

i) If there is no change in the standard composition labour force and total time expended is equal to the total standard time, the formula is:

Labour mix variance = standard cost of standard composition (for actual time taken) – standard cost of actual composition (for actual time worked).

ii) If the standard composition of labour force is revised due to shortage of a particular type of labour and total time expended is equal to the total standard time, the formula is:

Labour Mix variance = standard cost of revised standard composition (for actual time taken) – standard cost of actual composition (for actual time worked).

iii) If the total actual time of labour differs from the total standard time of labour, the formula is:

Total time of actual labour composition (standard cost of standard

-------------------------------------------------- x composition) – (standard cost of

Total time of standard labour composition actual composition)

iv) If the standard is revised and the total actual time of labour differs from the total standard time of labour, the formula for the calculation of labour mix is:

Labour mix variance =

Total time of actual labour composition (standard cost of revised standard ------------------------------------------------- x composition) – (standard cost of

Total time of revised standard labour actual composition)

composition

g) Labour yield variance:

It is like material yield variance and arises due to the difference between yield that should have been obtained by actual time utilized on production and actual yield obtained. It can be calculated as follows:

Standard labour cost per unit (actual yield in units – standard yield in units expected from the actual time worked on production)

h) Substitution variance:

This is a variance in labour cost which arises due to the substitution of labour when one grade of labour is substituted by another. This is denoted by difference between the actual hours at standard rate of standard worker and the actual hours at standard rate of actual worker.

Substitution variance = (actual hours x standard rate for standard worker) – (actual hours x standard rate for actual worker)