Labour variance analysis

Labour variance

1. LABOUR VARIANCE PRESENTED BY Submitted to ALIYA HAMZA (Roll no. 4) Pawan Kumar Gupta, NEHLA SHERIN (Roll no. 20) Assistant Professor, Department of Commerce, B.COM –II YEAR MGGAC , Mahe

2. definition: Labour variance refers to a situation in which actual costs of labour differ from projected or budgeted labour costs. A labour variance arises when the actual expense associated with a labour activity varies (either better or worse) from the expected amount. The expected amount is typically a budgeted or standard amount. The labour variance concept is most commonly used in production area, where it is called a Direct Labour Variance.

3. Types of labour variance Labour Cost Variance (LCV): It is the difference between the standard cost of labour allowed (as per the standard laid down) for the actual output achieved and the actual cost of labour employed. It is also called wages variance. It is further divided into following variances: Labour Rate Variance (LRV): It is the measure of difference between standard rate of wage specified and the actual rate of wage paid. Labour Efficiency Variance (LEV): It is a part of LCV. It is the difference between the standard labour hours specified and actual labour hours spent.

4. Labour Mix Variance (LMV): Labour mix variance arises only when two or more different types of workers employed and the composition of actual grade of workers differ from the standard composition of workers Labour Yield Variance (LYV): The Labour yield variance is one of the components of labour efficiency variance, which results from the difference between the actual output of worker and standard output of worker specified.

5. Formulas of labour variance Labour Cost Variance (LCV): LCV = (SH * SR) – (AH * AR) Labour Rate Variance (LRV): LRV=(SR – AR) AH Labour Efficiency Variance (LEV): LEV=(SH – AH) SR Labour Mix Variance (LMV): LMV=(RSH – AH) SR RSH=Standard hours/ Total Standard hours * Total Actual Hours Labour Yield Variance (LYV): LYV=(Standard yield – Actual yield) Average Standard Rate p.u .

6. EXAMPLE Problem: The information regarding the composition and hourly wage rates of labour force engaged on a job scheduled to be completed in 30 days are as follows: Category of Standard No. of Hourly wage rate Actual No. of Hourly wage workers workers per worker workers rate per worker Skilled 75 Rs. 6 70 Rs. 7 Semi-skilled 45 “ 4 30 “ 5 Unskilled 60 “ 3 80 “ 2 The work was completed in 32 hours. Calculate labour variances.

7. Solution: 1. LCV=(SH * SR) – (AH * AR) SH = Standard Man Hours Category of workers Standard Man Hours Actual Man Hours Skilled 75 * 30 = 2250 70 * 32 = 2240 Semi-skilled 45 * 30 = 1350 30 * 32 = 960 Unskilled 6 0 * 30 = 1800 80 * 32 = 2560 5400 5760 LCV: Skilled = (2250 * 6) – (2240 * 7) = 13500 – 15680 = 2180 (A) Semi-skilled = (1350 * 4) – (960 * 5) = 5400 – 4800 = 600 (F) Unskilled = (1800 * 3) – (2560 * 2) =5400 – 5120 = 280 (F) Total LCV 1300 (A) 2. LRV= (SR – AR) AH Skilled = (6 – 7) 2240 = 2240 (A) Semi-skilled = (4 – 5) 960 = 960 (A) Unskilled = ( 3 – 2) 2560 =2560 (F) Total LRV 640 (A)

8. Solution: 3. LEV = (SH – AH) SR Skilled = (2250 – 2240) 6 = 60 (F) Semi-skilled = ( 1350 – 960) 4 = 1560 (F) Unskilled = (1800 – 2560) 3 = 2280 (A) Total LEV 660 (A) 4. LMV = (RSH – AH) SR RSH = Standard Hours/ Total Standard Hours * Total Actual Hours RSH = Skilled = 2250/5400 * 5760 = 2400 Semi-skilled = 1350/5400 * 5760 = 1440 Unskilled = 1800/5400 * 5760 =1920 LMV = Skilled = (2400 – 2240) 6 = 960 (F) Semi-skilled = (1440 – 960) 4 = 1920(F) Unskilled = (1920 – 2560) 3 = 1920(A) Total LMV 960 (F) 5. LSEV = (SH – RSH) SR Skilled = (2250 – 2400) 6 = 900 (A) Semi-skilled = (1350 – 1440) 4 = 360 (A) Unskilled = (1800 – 1920) 3 = 360 (A) Total LSEV 1620 (A)

9. VERIFICATION : LCV = LRV + LEV 1300(A)= 640(A) + 660(A) LEV = LMV + LSEV 660(A) = 960(F) +1620(A)

10. ADVANTAGES Variance analysis helps to assign the responsibility of the business to various persons and departments. It is used as an accounting tool for cost control and helps to analyse large differences. Its helps the company to achieve its business target and ensure efficient utilization of the resources of the company. Thus it helps to create value for its shareholders.

11. limitations Variance analysis is done by the accounting staff at the end of each month. But it is not helpful if the management requires the feedback faster. It is a much expensive activity for small businesses. It is based on the predetermined standards . Standards limit the operating improvement upto a certain extend.

12. diagram

13. Conclusion The labour variance measures the difference between the actual and expected cost of labour. An unfavourable variance means that the cost of labour was more expensive than anticipated, while a favourable variance indicates that the cost of labour was less expensive than planned. The reporting of favourable and unfavourable variances is a key component of a command and control system, where the budget is the standard upon which performance is judged, and variances from that budget is rewarded or penalized.

14. Thank you