Introduction to Labour Variances
Such as the material variances, labour variances arise because of the difference among the standard labour cost for actual production and the actual labour cost. The following variances are calculated in case of direct labour.
I] Labour Cost Variance:
This variance is the major variance in case of labour and arises because of the difference among the standard labour cost for actual production and the actual labour cost. The following formula is employed for calculation of this variance.
Labour Cost Variance = Standard Labour Cost for Actual Production - Actual Labour Cost
This variance will be positive is the actual labour cost is less than the standard labour cost and adverse if the actual labour cost is more than the standard labour cost.
II] Labour Rate Variance:
One of the reasons for labour cost variance is the variations among the standard rate of wages and actual wages rate. The labour rate variance denoted the variation among the standard labour rate and the actual labour rate paid. The formula for computation is as follow:
Labour Rate Variance: Actual Hours Paid [Standard Rate - Actual Rate]
This variance will be positive if the actual rate paid is less than the standard rate. The labour rate variance is that portion of direct labour cost variance that is because of the variation among the labour rates.
III] Labour Efficiency Variance:
It is of paramount significance that efficiency of labour is measured. For doing this, the actual time taken through the workers should be compared along with the standard time permitted for the job. The standard time allowed for a specific job is decided with the help of time and motion study. The efficiency variance is calculated with the help of the following formula described below:
Labour Efficiency Variance = Standard Rate [Standard Hours for Actual Output - Actual Hours worked]
This variance will be positive is the actual time taken is less than the standard time.
IV] Labour Mix Variance or Gang Composition Variance:
This variance is identical to the material mix variance and is calculated in the same manner. In doing a specific job, there may be a specific combination of labour force that may contain skilled, semi skilled and unskilled workers. Though because of some practical difficulties, this composition might have to be changed. How much is the loss caused because of this change or how much is the gain because of this change is indicated through this variance. The calculation is completed with the help of the following formula.
Labour Mix Variance = Standard Cost of Standard Mix - Standard Cost of Actual Mix.
V] Labour Yield Variance:
This variance denotes the variation among the actual output and the standard output based on actual hours. In other words, a comparison is made among the actual production acquired and the production that should have been acquired in actual number of working hours. The variance will be favourable is the actual output acquired is more than the standard output. The calculation is completed in the following manner.
Labour Yield Variance = Average Standard Wage Rate Per Unit [Actual Output - Standard Output]
VI] Idle Time Variance:
This variance denotes the loss caused because of abnormal idle time. When fixing the standard time, normal idle time is taken into consideration. Though if the actual idle time is more than the standard/normal idle time, it is known as abnormal idle time. This variance will be all the time adverse and will be computed as displayed below.
Idle Time Variance = Abnormal Idle Time X Standard Rate
The following chart will depict the relationships between several labour variances.
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