Labour/Labor :: Standard/Actual/Budgeted Input/Output/Time/Rate/Cost

Labour/Labor Cost & Variance

Labour/Labor Variance implies the variances in cost incurred on Labour/Labors used for obtaining the output. Labour/Labor Cost It is the cost of labor used in the manufacture of a product. Since Value = Quantity × Price (≡ Cost of labour = labour Time × Rate at which labor are paid), we can say that the labour/labor cost is influenced by two factors, (1) The time for which the labour/labor are engaged; and (2) The wage rate at which the labour/labor are engaged. Types of Labour/Labor :: Gang Composition As we use different types of materials for the manufacture of a product, we also use various types of labour/labor in the product manufacturing process. We use the terms Labour/Labor Mix or Gang Composition to indicate that there are more than one kind of labourers/laborers involved in the production process. Some examples we come across in problem solving on labour/labor variances: A production process needs some "skilled", some "semi-skilled" and some "un-skilled" workers, we consider these three to be different types of labour/labor which would be remunerated with varying rates of pay. A production process employs "men", "women" and "boys" as labourers/laborers. We consider each of them to be a particular type. It is obvious that each would be remunerated with varying rates of pay. If the rate of pay planned to be paid (standard) for all the different types of labour/labor is the same, such a classification would not be made for the purpose of variance analysis. The data in this table is referred to in all the explanations below Standard [Production: 7,500 units] Actual [Production: 7,125 units] Time (hrs) Rate (Rs/hr) Cost (Rs) Rate (Rs/hr) Total/Gross Net(Normal) Abnromal Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Skilled 200 20 4,000 22 240 5,280 216 4,752 24 528 Semi Skilled 400 15 6,000 14 500 7,000 450 6,300 50 700 Un Skilled 150 10 1,500 12 220 2,640 198 2,376 22 264 Total 750   11,500   960 14,920 864 13,428 96 1,492

Standards

The term standard implies "A basis for comparison i.e. a reference in comparison to which other things can be evaluated". The following terms involving standards are relevant to this topic. Standard Time (of Labour/Labor Input) The Labour/Labor time of a particular type of labour/labor required for manufacturing the product. It may be expressed in terms of (for) one or more units output. Standard Labour/Labor time required for producing 1 unit is 15 minutes. Standard output is 120 units and the Labour/Labor time required for the same is 1,800 minutes or 30 hours. Where more than one type of Labour/Labor is used for producing the output, we recognise or identify The time relating to each type of labour/labor separately as "Standard Labour/Labor Time" [STLab] From the above data STSk = 200 hrs; STSe = 400 hrs; STUn = 150 hrs; The total time of all the labourers/laborers together as "Standard Time of Mix" [STMix]. Standard Time of Mix = Sum of the Standard Times of Individual Labourers/Laborers   ⇒ STMix = STA + STB + ....... From the above data STMix = STSk + STSe + STUn = 200 hrs + 400 hrs + 150 hrs = 750 hrs Where there is only one labour/labor type STMix and STLab would be the same i.e. STMix = STLab. Standard Mix/Gang Composition (Ratio) Where there are two or more types of labour/labor involved in the production process, this indicates the ratio in which the component labour/labor types are to be combined, if the production process is carried on according to plans. It is the ratio of the standard labour/labor times. From the above data, Standard Mix Ratio = STSk : STSe : STUn = 200 hrs : 400 hrs : 150 hrs = 4 : 8 : 3 Standard Rate (of Labour/Labor) [SR] The rate of wages planned to be paid to the Labourers/Laborers used in the production process. Where more than one type of labour/labor is used for producing the output, we recognise or identify The Rate of Pay for each labour/labor type separately as "Standard Rate of Labour/Labor" [SRLab] From the above data, SRSk = Rs. 20/hr; SRSe = Rs. 15/hr; SRUn = Rs. 10/hr; The Rate of Pay for all the labour/labor types together as "Standard Rate of Mix" [SRMix]. It is the weighted average of the rates of component labour/labor types taking standard labour/labor times as weights. Standard Price of Mix = Standard Cost of Mix Standard Time of Mix ⇒ SRMix = SCMix STMix From the above data, SRMix = Rs. 11,500 750 hrs = Rs. 46 3 /hr Note: Where there is only one labour/labor type SR(SM) and SR would be the same. Standard Cost (of Labour/Labor Input) [SC] The cost of Labour/Labor for manufacturing one or more units of the product had all the actions been according to plans. It is the value of standard Labour/Labor time taken at the standard rate of pay.     Standard Cost = Standard Time × Standard Rate     ⇒ SC = ST × SR Where more than one type of labour/labor is used for producing the output, we recognise or identify The cost of each labour/labor type separately as "Standard Cost of Labour/Labor" [SCLab] From the above data, SCSk = STSk × SRSk SCSe = STSe × SRSe SCUn = STUn × SRUn = 200 hrs × Rs. 20/hr = 400 hrs × Rs. 15/hr = 150 hrs × Rs. 10/hr = Rs. 4,000 = Rs. 6,000 = Rs. 1,500 The total cost of all the labour/labor types together as "Standard Cost of Mix" [SCMix]. Standard Cost of Standard Mix = Sum of the Standard Costs of Individual Labour/Labor types SCMix = SCSk + SCSe + ....... From the above data, SCMix = SCSk + SCSe + SCUn = Rs. 4,000 + Rs. 6,000 + Rs. 1,500 = Rs. 11,500 SCMix = STMix × SRMix From the above data, SCMix = STMix × SRMix = 750 hrs × Rs. 46 3 /hr = Rs. 11,500 Where there is only one labour/labor type SCMix and SCLab would be the same. Standard Output/Production It is the output that is achieved using the standard Labour/Labor time. From the above data SO = 7,500 units Standard Rate of Yield/Output [SR(SO/SY)] The standard labour/labor cost incurred per unit output. This can be calculated for each labour/labor type separately or for all the labour/labor types together. Standard Rate of Standard Output (All Labour/Labor types) = Standard cost of Mix Standard Output ⇒ SR(SO)Mix = SCMix SO From the above data, SP(SO)Mix = SCMix SO = Rs. 11,500 7,500 units = Rs. 23 15 /unit Standard Rate of Standard Output (Each Labour/Labor type) = Standard Cost of the Labour type Standard Output ⇒ SR(SO)Lab = SCLab SO From the above data, SR(SO)Sk = SCSk SO SR(SO)Se = SCSe SO SR(SO)Un = SCUn SO = Rs. 4,000 7,500 units = Rs. 6,000 7,500 units = Rs. 1,500 7,500 units = Rs. 8 15 /unit = Rs. 0.80/unit = Rs. 0.20/unit

Actuals

The term actual relates to the data pertaining to the actual activity. The following terms involving actuals are relevant to this topic. Actual (Gross) Time/Input (of Labour/Labor) The Labour/Labor time actually worked during the process of manufacturing the product. Where more than one type of Labourers/Laborers are used for producing the output, we recognise or identify The actual (Gross) time for each type of Labour/Labor separately as "Actual (Gross)Time of Labour/Labor" [AT(G)Lab] From the above data, AT(G)Sk = 240 hrs; AT(G)Se = 500 hrs; AT(G)Un = 220 hrs; The actual (Gross) time for all the Labourers/Laborers together as "Actual (Gross) Time of Mix" [AT(G)Mix]. Actual (Gross) Time of Mix = Sum of the Actual (Gross) Times of Individual Labour/Labor types ⇒ AT(G)Mix = AT(G)Sk + AT(G)Se + ....... From the above data, AT(G)Mix = AT(G)Sk + AT(G)Se + AT(G)Un = 240 hrs + 500 hrs + 220 hrs = 960 hrs Where there is only one type of labour/labor AT(G)Mix and AT(G)Lab would be the same i.e. AT(G)Mix = AT(G)Lab Actual (Idle) Time (of Labour/Labor) Where there is abnormal loss of time, the "Total (Gross) Time" is seggregated into "Net Time" and "Abnormal Idle Time". Where more than one type of Labourers/Laborers are used for producing the output, we recognise or identify The actual (Idle) time for each type of Labour/Labor separately as "Actual (Idle)Time of Labour/Labor" [AT(Id)Lab] From the above data, AT(Id)Sk = 24 hrs; AT(Id)Se = 50 hrs; AT(Id)Un = 22 hrs; The actual (Idle) time for all the Labourers/Laborers together as "Actual (Idle) Time of Mix" [AT(Id)Mix]. Actual (Idle) Time of Mix = Sum of the Actual (Idle) Times of Individual Labour/Labor types ⇒ AT(Id)Mix = AT(Id)Sk + AT(Id)Se + ....... From the above data, AT(Id)Mix = AT(Id)Sk + AT(Id)Se + AT(Id)Un = 24 hrs + 50 hrs + 22 hrs = 96 hrs Where there is only one type of labour/labor AT(Id)Mix and AT(Id)Lab would be the same i.e. AT(Id)Mix = AT(Id)Lab Actual (Net) Time/Input (of Labour/Labor) Where there is abnormal loss of time, the "Total (Gross) Time" is seggregated into "Net Time" and "Abnormal Idle Time". Actual (Net) Time = Actual (Gross) Time − Actual (Idle) Time. Where more than one type of Labourers/Laborers are used for producing the output, we recognise or identify The actual (Net) time for each type of Labour/Labor separately as "Actual (Net) Labour/Labor Time" [AT(N)Lab] AT(N)Lab = AT(G)Lab − AT(Id)Lab From the above data, AT(N)Sk = AT(G)Sk − AT(Id)Sk AT(N)Se = AT(G)Se − AT(Id)Se AT(N)Un = AT(G)Un − AT(Id)Un = 240 hrs − 24 hrs = 550 hrs − 55 hrs = 220 hrs − 22 hrs = 216 hrs = 450 hrs = 198 hrs The actual (Net) time for all the Labour/Labor types together as "Actual (Net) Time of Mix" [AT(N)Mix]. Actual (Net) Time of Mix = Sum of the Actual (Net) Times of Individual Labour/Labor types ⇒ AT(N)Mix = AT(N)Sk + AT(N)Se + ....... From the above data, AT(N)Mix = AT(N)Sk + AT(N)Se + AT(N)Un = 216 hrs + 450 hrs + 198 hrs = 864 hrs Where there is only one type of labour/labor AT(N)Mix and AT(N)Lab would be the same i.e. AT(N)Mix = AT(N)Lab Actual Mix/Gang-Composition (Ratio) Where there are two or more types of Labourers/Laborers involved in the production process, this indicates the ratio in which the component Labourers/Laborers are actually employed. It is the ratio of the actual labour/labor time of various labour/labor types making up the mix/gang. {Actual Mix Ratio = AT(N)Sk : AT(N)Se : AT(N)Un               = 216 hrs : 450 hrs : 198 hrs = 12 : 25 : 11} Actual Output/Production It is the output that is actually achieved using the actual Labour/Labor time. Actual Rate (of Labour/Labour) The rate of wages actually paid to the labourers/laborers used in the production process. Where more than one type of labour/labor is used for producing the output, we recognise or identify The Rate of/for each labour/labor type separately as "Actual Labour/Labor Rate" [ARLab] From the above data, ARSk = Rs. 22/hr; ARSe = Rs. 14/hr; ARUn = Rs. 12/hr; The Rate of/for all the labour/labor types together as "Actual Rate of Mix" [ARMix]. It is the weighted average of the actual rates of component labour/labor taking actual times as weights. Actual Rate of Mix = Actual (Gross) Cost of Mix Actual (Gross) Time of Mix ⇒ ARMix = AC(G)Mix AT(G)Mix From the above data, ARMix = Rs. 14,920 960 hrs = Rs. 373 24 /hr Note: Where there is only one type of labour/labor AR(G)Mix and AR(G)Lab would be the same. Actual Cost of Actual (Gross) Labour/Labor Time The actual cost of labour/labor incurred for manufacturing the actual output. It is the value of actual (Gross) labour/labor time taken at the actual rate of pay.     ⇒ Actual Cost = Actual (Gross) Time × Actual Rate     ⇒ ACLab = AT(G)Lab × ARLab Where more than one type of labour/labor is used for producing the output, we recognise or identify The cost of each labor/labour type separately as "Actual Cost of Labour/Labor" [ACLab] From the above data, ACSk = AT(G)Sk × ARSk AC(G)Se = ATSe × ARSe ACUn = AT(G)Un × ARUn = 240 hrs × Rs. 22/hr = 500 hrs × Rs. 14/hr = 220 hrs × Rs. 12/hr = Rs. 5,280 = Rs. 7,000 = Rs. 2,640 All the labour/labor types together as "Actual Cost of Mix" [AC(G)Mix]. Actual Cost of Mix = Sum of the Actual Costs of Individual Labour/Labor types   ⇒ AC(G)Mix = AC(G)Sk + AC(G)Se + ....... From the above data, AC(G)Mix = AC(G)Sk + AC(G)Se + AC(G)Un = Rs. 5,280 + Rs. 7,000 + Rs. 2,640 = Rs. 14,920 Alternatively, AC(G)Mix = AT(G)Mix × AR(G)Mix From the above data, AC(G)Mix = 960 hrs × Rs. 373 24 /hr = Rs. 14,920 Where there is only one type of labour/labor SC(G)Mix and SC(G)Lab would be the same i.e. SC(G)Mix = SC(G)Lab Actual Cost of Actual (Net) Labour/Labor Time It is the value of actual (Net) labour/labor time taken at the actual rate of pay.     ⇒ Actual Cost = Actual (Net) Time × Actual Rate     ⇒ ACLab = AT(N)Lab × ARLab The value of actual cost of labour/labor is used in identifying cost and price variances. In both these cases, what we need is the actual (gross) labour/labor cost and actual (net) labour/labor is not used anywhere. Thus its calculation is not considered. Standard Cost of Actual (Gross) Labour/Labor Time The cost of labour/labor arrived at by considering the actual (gross) labour/labor time used and valuing them at standard rate. Standard Cost of Actual (Gross) Time = Actual (Gross) Time × Standard Rate ⇒ SC of ATG = ATG × SR Where more than one type of labour/labor is used for producing the output, we recognise or identify The cost of each labor/labour type separately as "Standard Cost of (Gross) Actual Time" [SC of ATG] From the above data, SC of AT(G)Sk = AT(G)Sk × SRSk SC of AT(G)Se = AT(G)Se × SRSe SC of AT(G)Un = AT(G)Un × SRUn = 240 hrs × Rs. 20/hr = 500 hrs × Rs. 15/hr = 220 hrs × Rs. 10/hr = Rs. 4,800 = Rs. 7,500 = Rs. 2,200 All the labour/labor types together as "Standard Cost of Actual (Gross) Mix" [SC(G)Mix]. Standard Cost of Actual (Gross) Mix       = Sum of the Standard Costs of Actual (Gross) Times of Individual Labour/Labor types.   ⇒ SC(G)Mix = (SC of AT(G)Sk) + (SC of AT)(G)Se + ....... From the above example SC of AT(G)Mix = SC of AT(G)Sk + SC of AT(G)Se + SC of AT(G)Un = Rs. 4,800 + Rs. 7,500 + Rs. 2,200 = Rs. 14,500 Note that SC of AT(G)Mix ≠ AT(G)Mix × SRMix The formula cannot be applied for the actual time of mix. This is for the reason that SRMix is the weighted average of Standard Rates taking standard times as weights and the present calculation considers the actual times. Standard Cost of Actual (Net) Labour/Labor Time The cost of labour/labor arrived at by considering the actual (net) labour/labor time used and valuing them at standard rate. Standard Cost of Actual (Net) Time = Actual (Net) Time × Standard Rate ⇒ SC of ATN = ATN × SR Where more than one type of labour/labor is used for producing the output, we recognise or identify The cost of each labor/labour type separately as "Standard Cost of Actual (Net) Time" [SC of ATN] From the above data, SC of AT(N)Sk = AT(N)Sk × SRSk SC of AT(N)Se = AT(N)Se × SRSe SC of AT(N)Un = AT(N)Un × SRUn = 216 hrs × Rs. 20/hr = 450 hrs × Rs. 15/hr = 198 hrs × Rs. 10/hr = Rs. 4,320 = Rs. 6,750 = Rs. 1,980 All the labour/labor types together as "Standard Cost of Actual (Net) Mix" [SC(N)Mix]. Standard Cost of Actual (Net) Mix       = Sum of the Standard Costs of Actual (Net) Times of Individual Labour/Labor types.   ⇒ SC(N)Mix = (SC of AT(N)Sk) + (SC of AT)(N)Se + ....... From the above example SC of AT(N)Mix = SC of AT(N)Sk + SC of AT(N)Se + SC of AT(N)Un = Rs. 4,320 + Rs. 6,750 + Rs. 1980 = Rs. 13,050 Note that SC of AT(N)Mix ≠ AT(N)Mix × SRMix The formula cannot be applied for the actual time of mix. This is for the reason that SRMix is the weighted average of Standard Rates taking standard times as weights and the present calculation considers the actual times. Standard Cost of Actual (Idle) Labour/Labor Time The cost of labour/labor arrived at by considering the actual (Idle) labour/labor time used and valuing them at standard rate. Standard Cost of Actual (Idle) Time = Actual (Idle) Time × Standard Rate ⇒ SC of ATId = ATId × SR Where more than one type of labour/labor is used for producing the output, we recognise or identify The cost of each labor/labour type separately as "Standard Cost of Actual (Idle) Time" [SC of ATId] From the above data, SC of AT(Id)Sk = AT(Id)Sk × SRSk SC of AT(Id)Se = AT(Id)Se × SRSe SC of AT(Id)Un = AT(Id)Un × SRUn = 24 hrs × Rs. 20/hr = 50 hrs × Rs. 15/hr = 22 hrs × Rs. 10/hr = Rs. 480 = Rs. 750 = Rs. 220 All the labour/labor types together as "Standard Cost of Actual (Idle) Mix" [SC(Id)Mix]. Standard Cost of Actual (Idle) Mix       = Sum of the Standard Costs of Actual (Idle) Times of Individual Labour/Labor types.   ⇒ SC(Id)Mix = (SC of AT(Id)Sk) + (SC of AT)(Id)Se + ....... From the above example SC of AT(Id)Mix = SC of AT(Id)Sk + SC of AT(Id)Se + SC of AT(Id)Un = Rs. 480 + Rs. 750 + Rs. 220 = Rs. 1,450 Note that SC of AT(Id)Mix ≠ AT(Id)Mix × SRMix The formula cannot be applied for the actual time of mix. This is for the reason that SRMix is the weighted average of Standard Rates taking standard times as weights and the present calculation considers the actual times.

Working Table (for Problem Solving)

Preparing a working table as given below would give you all the information that you need. You can construct this table very easily. All the data mentioned above can be straight away obtained from this table except the SC for ATG, SC for ATN, SC for ATId, SCMix for AO and SR(SO/SY) Standard [Production: SO] Actual [Production: AO] Time (hrs) Rate (Rs/hr) Cost (Rs) Rate (Rs/hr) Total/Gross Abnromal Net Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Sk STSk SRSk SCSk ARSk AT(G)Sk AC(G)Sk AT(Id)Sk AC(Id)Sk AT(N)Sk AC(N)Sk Se STSe SRSe SCSe ARSe AT(G)Se AC(G)Se AT(Id)Se AC(Id)Se AT(N)Se AC(N)Se Un .. .. .. .. .. .. .. .. .. .. Total STMix SRMix SCMix ARMix AT(G)Mix AC(G)Mix AT(Id)Mix AC(Id)Mix AT(N)Mix AT(N)Mix Abnormal Idle Time The above working table would have data filled in all its cells when there is abnormal loss of time normally called abnormal idle time. Gross time is the total time and Net time is the time left after deducting abnormal idle time from Gross time. In calculating Labour/Labor Cost, Rate of Pay and Gross Efficiency variance we take the Gross Time into consideration. In calculating the Net Efficiency and its components Gang Composition and Yield variances we take the Net time into consideration. In calculating the Idle Time variance we use the abnormal idle time. Where there is no Abnormal Idle Time If there is no abnormal loss of time, then the gross time and the net time would mean the same in which case the working table would look simpler and similar to the table we construct for material variances. The Gross Time and the Net Time being the same we do not show them twice and we identify the time only as actual time instead of Gross and Net Times. Standard [Production: 7,500 units] Actual [Production: 7,125 units] Time (hrs) Rate (Rs/hr) Cost (Rs) Total [Gross/Net] Rate (Rs/hr) Time (hrs) Cost (Rs) Skilled 200 20 4,000 22 240 5,280 Semi Skilled 400 15 6,000 14 500 7,000 Un Skilled 150 10 1,500 12 220 2,640 Total 750   11,500   960 14,920 Note: In building a table for cases where there is abnormal idle time, we use a single rate column for the actual data, since the rate would be the same for the Gross, Idle and Net times. Where there is no abnormal idle time we may place the rate column in the middle. Please pay attention while considering the data. Standard [Production: 7,500 units] Actual [Production: 7,125 units] Time (hrs) Rate (Rs/hr) Cost (Rs) Time (hrs) Rate (Rs/hr) Cost (Rs) Skilled 200 20 4,000 240 22 5,280 Semi Skilled 400 15 6,000 500 14 7,000 Un Skilled 150 10 1,500 220 12 2,640 Total 750   11,500 960   14,920

Budget/Budgeted

A Budget is a depiction of the future in quantitative terms. A Production Time Budget indicates the time required for achieving a planned output over a future period or production process. A cash budget indicates the inflow and outflow of cash over a certain period. A labour cost budget indicates the expenditure on account of labour/labor that is to be incurred over the budget period. Budgeted The term budgeted relates to the data pertaining to a specified level of activity that has been planned to be achieved. The following terms involving budgets are relevant to this topic Budgeted Labour/Labor Time/Input It is the standard Labour/Labor time input into the production process for achieving the budgeted output. Budgeted Labour/Labor Time = Standard Labour/Labor Time Per unit output × Budgeted Output   ⇒ BT = ST × BO Budgeted Output/Production It is the output that is planned to be achieved during a period or production process. Budgeted Rate (of Labour/Labor) It is nothing but the standard rate of pay.   ⇒ BR = SR Budgeted Labour/Labor Cost The cost of Labour/Labor incurred for manufacturing the budgeted output. It is the value of budgeted Labour/Labor time taken at the standard rate of pay. Budgeted Labour/Labor Cost = Budgeted Labour/Labor Time × Standard Rate   ⇒ BC = BT × SR Budgeted vs Standard Budgeted indicates a specific level of activity and Standard may indicate any level of activity. For example, "Budgeted Output" is the output that is planned to be achieved by the organisation in a given period/process and "Standard Output" is "that output for which the standards are expressed". "Standard Cost" gives an idea of how much each unit of the product should cost under normal circumstances. "Budget Cost" gives an idea of the cost that should be incurred for bringing out the budget quantity of output (over a certain period or in a certain process) under normal circumstances. Sometimes, we use the terms Budgeted and Standard synonymously, but they need not be the same. For analysing variances, we need the standards In analysing variances we need the data relating to the standards, i.e. data relating to the standard time (ST), rate (SR) and output (SO). Budgets are always as per the standard It should be noted that the budgeted data is always based on standards. Standards are fixed for each unit of production and budgeted data is relevant to a particular production level. Standards may be expressed for any level (1 unit, 2 units, 10 units,... or for any production level) and the budgets are based on the standards. Since budgeted data is standard data for a particular production level we do not need separate data for the standard when the budgeted data is given. SO = BO The standard output and the budgeted output are the same. Standard [Production: 1 unit] Budgeted [Production: 1 unit] Actual [Production: 1 unit] Time (hrs) Rate (Rs/hr) Cost (Rs) Time (hrs) Rate (Rs/hr) Cost (Rs) Time (hrs) Rate (Rs/hr) Cost (Rs) Workers (Men) 120 8 960 120 8 960 124 8.50 1,054 The actual output is also the same as the standard output as well as the budgeted output. SO ≠ BO The standard output and the budgeted output are not the same. Standard [Production: 10 units] Budgeted [Production: 25 units] Actual [Production: 20 units] Time (hrs) Rate (Rs/hr) Cost (Rs) Time (hrs) Rate (Rs/hr) Cost (Rs) Time (hrs) Rate (Rs/hr) Cost (Rs) Skilled Workers 1,200 8 9,600 3,000 8 24,000 720 9 6,480 The actual output is not equal to the standard output as well as the budgeted output.

Author Credit : The Edifier

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