Standard Costing-Labor Variance

March 17th, 2007 Comments off
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TOTAL LABOR VARIANCE.

·    It is the difference between the standard labor cost for the actual production and the actual costs.

·    This variance consists of two part namely:

 ( Wage RATE Variance )

 And

( Labor EFFICIENCY Variance)

Wage RATE Variance

The result of paying an actual rate of labor at an ACTUAL price that is different from the STANDARD price.

Probable Causes Of Wage Rate Variance:

  • An adverse wage rate variance may be due to higher actual wage rates being paid because of increases in wage rates after the standards have been set.
  • May also be due to employing higher paid workers to do the work normally done by lower paid workers.

Purpose of this variance:

  • Control the cost of direct labor;
  • Evaluate the performance of the personnel department and
  • Measure the impact of wages increases or decreases on the company’s profit

Formula for Wage RATE Variance

Wage Rate Variance

=

(Actual rate per hour-Standard rate per hour) x Actual hours worked

Labor EFFICIENCY Variance

  • The result of buying an actual quantity of materials at an ACTUAL price that is different from the STANDARD price.

Probable Causes Of Labor EFFICIENCY Variance:

  • Ill health of workers
  • Use of lower-skilled or higher-skilled workers
  • Effects of learning curve
  • Use of lower-quality or higher-quality materials
  • Changes in production methods
  • Installation of new equipment
  • Poorly maintained equipment or machine malfunction
  • Insufficient training, incorrect instruction, or worker dissatisfaction

Purpose of this variance:

  • Measures the productivity of a firm’s labor force.

Formula for Labor EFFICIENCY Variance

Labor EFFICIENCY Variance

=

(Actual hours work less Standard hours allowed) x Standard rate per hour.

Illustration Of Total Labor Variance

Example:

Details of standard Labor cost for Product A:

Standard wage rate  -$0.60

Standard hour needed  2 hours

For month of June

Actual as follows:

Production of Product A -100 units

Actual wage rate -$0.70 & actual hours needed -220 hours

Solution

Total Labor Cost Variance =

Actual cost (220 x $0.70 )     =$154

Standard cost (200 x $0.60)  =$120

Total Labor Cost Variance     =$34 ADVERSE variance

Total labor cost variance = Wage rate variance + Labor efficiency variance ( refer below)

(a) To compute Wage RATE variance=

(Actual rate/hour less Standard rate/hr) x Actual hour worked

=($0.70-$0.60) x220 = $22 ADVERSE variance

(b) To compute Labor EFFICIENCY variance=

(Actual hours worked less Standard hours allowed) x Standard rate/hr

=(220-200) x $0.60 = $12 ADVERSE variance

Total Labor Cost Variance = Wage RATE variance + Labor EFFICIENCY variance

= $22(adverse) +$12(adverse)

= $34(adverse)

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Financial Accounting

 
 

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