Discuss on Labour Cost Variances

      

Discuss on Labour Cost Variances

  

Answers


Wilfred
- This is the difference between the standard direct labour cost and the actual direct labour cost incurred for the production achieved. This is the sum of labour rate variance and labour efficiency variance.

(a) Labour Rate Variance
This is the difference between the standard and actual direct labour hour rate per hour for the total hours worked. It is calculated as under:
(Actual rate x Actual hours) – Standard rate x Actual hours
- The main causes of these variances are:-
i) Higher or lower rate paid t the workers as compared to standard rate.
ii) Different grades of labourers used than planned.
iii) Payment of bonus or overtime to the workers not anticipated in advance.

(b) Labour Efficiency Variance
- This is the difference between the standard hours for the actual production achieved and the hours actually worked, valued at the standard labour rate. It is calculated as under:-
Standard labour rate (actual hours – standard hours)
- The variance arises due to the following reasons:-
i) Lower or higher efficiency of workers than anticipated
ii) Poor supervision
iii) Use of inferior quality of materials or machine problems.
iv) The attitude of workers.

(c) Idle Time Variance
- Sometimes, there is idle time variances also. These variances arise when some wages are paid for idle time. This variance is also adverse. It is calculated as under:-
Idle time x Standard labour rate.

Example:
Standard rate per hour Shs 10
Standard time per unit 2 hours
Time worked 4250 hours
Time paid (4326 hours) Shs 42,500
Production achieved 2180 units
Answer
1. Labour rate variance
= (A.R x A.H) – (S.R. x A.H)
= Shs 42500 – shs 10 x 4326)
= Shs 42500 – shs 43260 = shs 760 F
2. Labour efficient variance
= S.R (A.H – S.H)
= Shs 10 (4250 – 4360)
= Shs 10 (110) = Shs 1100 F
3. Idle time variance
= S.R (Idle time)
= S.R (Time paid – Time worked)
= Shs 10 (4326 – 4250)
= Shs 10 (76) = Shs 760 A
4. Labour cost variance
= Labour rate variance + Labour efficiency Variance + idle time Variance
= Shs 760 F + Shs 1100 F + Shs 760 A
= Shs 1100 F

Check
1. Labour cost variance = A.C – S.C
= Shs 42,500 – (Shs 20 x 2180)
= Shs 42,500 – 43,600
= Shs 1100 F
2. Standard cost per unit = Shs 10 x 2 hours
= Shs 20
Where:
A.H = Actual hours
S.H = Standard hours
S.R = Standard Rate
A.R = Actual rate
A.C = Actual cost
S.C = Standard cost
Standard hours = Standard hours per unit x Actual Production
= 2 x 2180 = 4360

Note:
Labour rate variance is calculated on the basis of time paid and labour efficiency variance on the basis of time worked.
Wilfykil answered the question on August 6, 2019 at 11:45


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