Labour/Labor :: Usage/Efficiency Variance

... From Page L:7
A Problem  
 
200 hrs of Skilled Labour/Labor @ Rs. 20 per hr, 400 hrs of Semi-Skilled Labour/Labor @ Rs. 15/hr and 150 hrs of Unskilled Labour/Labor @ Rs. 10 per hr were planned to be utlised for manufacturing 7,500 units of a product. 240 hrs of skilled labour/labor @ Rs. 22 per hr, 500 hrs of Semi-skilled labour/labor @ Rs. 14/hr and 220 hrs of Unskilled labour/labor @ Rs. 12 per hr were actually used for manufacturing 7,125 units of the product. 16 hrs of Skilled Labour/Labor time, 50 hrs of Semi-Skilled Labour/Labor time and 22 hrs of Unskilled Labour/Labor time were lost due to break down which is abnormal.

What is the variation in total cost on account of efficiency/ineffciency in the usage of labour/labor?
This information is provided by the Labour/Labor Usage/Efficiency variance.

The problem data arranged in a working table:

Standard
[Production: 7,500 units]
Actual
[Production: 7,125 units]
Time
(hrs)
Rate
(Rs/hr)
Cost
(Rs)
Rate
(Rs/hr)
Total 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

The Formulae Labour/Labor Efficiency/Usage Variance (LEV/LUV)  
 
That part of the variance in the total cost of labour/labor on account of a variation in the usage of labour/labor i.e difference between the standard rate at which labour/labor time is to be employed (i.e. the standard time for actual output) and the actual rate at which they have been used (i.e. the actual times). It is a part of the Labour/Labor Cost Variance.

It is the difference between the Standard Cost of Standard Time for Actual Output and the Standard Cost of Actual (Net) Labour/Labor Time.
⇒ Labour/Labor Efficiency/Usage Variance
        = Standard Cost of Standard Time for Actual OutputStandard Cost of Actual (Net) Time

  • For each Labour/Labor Type Separately

    LEV/LUVlab = SC of STLab for AO − SC of AT(N)Lab
    =
    ({
    AO
    SO
    × STLab} × SRLab)
    − (AT(N)Lab × SRLab)
    =
    ({
    AO
    SO
    × STLab} − AT(N)Lab) × SRLab)
  • For all Labour/Labor Types together
    [Total Labour/Labor Efficiency/Usage Variance :: TLEV/TLUV]

    When two or more types of labour/labor are used for the manufacture of a product, the total Labour/Labor Efficiency/Usage variance is the sum of the variances measured for each labour/labor type separately.

    ⇒ TLEV/TLUV = LEV/LUVSk + LEV/LUVSe + ....

LEV/LUV » Formula interpretation  
 
The above formulae for Labour/Labor Efficiency/Usage Variance, can be used in all cases i.e. both when AO = SO as well as when AO ≠ SO. When AO ≠ SO, the ratio AO/SO works as a correction factor to readjust the ST to ST for AO and thereby the SC to SC for AO.

  • Actual Time ⇒ Net Time

    Wherever you find the presence of actual time in the formula, you should interpret it as Actual (Net) Time. Where there abnormal loss of time, the actual time is segregated into two as abnormal loss time and net time. Even in such cases, for the purpose of calculating the Efficiency/Usage Variance, the (Net) time should be considered for actual time.
  • Where AO = SO

    When AO = SO,
    AO
    SO
    becomes 1 thus nullifying its effect, in which case the formula would read as:

    For each labour/labor type separately
    LEV/LUV = (STLab × SRLab) − (AT(N)Lab × SRLab)
    (Or) = (STLab − AT(N)Lab) × SRLab

    For all Labour/Labor types together
    There is no direct formula

  • LEV/LUV = 0

    Labour/Labor efficiency/usage variance for each labour/labor type would be zero, when the acutal (net) labour/labor time used and the standard labour/labor time for actual output are the same.
  • TLEV/TLUV = 0

    When more than one labour/labor types are used, the total LEV/LUV may become zero
    1. When the LEV/LUV on account of each labour/labor type is zero, or
    2. When the unfavourable variance due to one or more labour/labor types is set off by the favourable variance due to one or more other labour/labor types.

    Therefore, it would not be appropriate to conclude that there is no variance on account of any labour/labor type just because the total LEV/LUV is zero.

    Where the total LEV/LUV is zero, you have to verify individual variances before concluding that all the variances (LEV's/LUV's) are zero.

Why only Net Time??  
 
"Actual Time" implies "Actual (Net) Time", where there is abnormal idle time.

The LEV/LUV is a labour/labor productivity indicator. The efficiency in utilising labour/labor time is revealed through this variance.

Abnormal loss of time may be on account of many reasons like, machinery breakdown, power breakdown, lack of material availability, natural calamities, improper scheduling, strike, lockout, etc..

Whether the labourers/laborers have worked efficiently or not is revealed by measuring the output achieved by them during the time they work. The labourers/laborers cannot be held responsible for the loss of production on account of abnormal idle time.

Thus the loss due to time lost on account of abnromal reasons would be dealt with separately and LEV/LUV wishes to measure only the level to which the worker performs his work during the time he/she works. Therefore, the time lost on account of abnormal reasons would be dealt with separately in the "Labour Idle Time Variance".

Why use Total Time in Cost and Rate of Pay Variances??

The labour/labor cost variance reflects the total variance on account of all reasons and thus we take the total time into consideration in measuring the Labour/Labor Cost Variance.

The wages are to be paid to the workers for all the hours they work (both nromal hours and abnormal idle hours). Thus in measuring the variance on account of paying more or less, we have to consider all the time for which we pay. As such the total time is considered for measuring the Rate of Pay Variance.

Solution [Using the data as it is]  
 
For working out problems with the data considered as it has been given without having to do any recalculations, use the above formulae (which are capable of being used in all cases)

Consider the working table above:

Standard
[Production: 7,500 units]
Actual
[Production: 7,125 units]
Time
(hrs)
Rate
(Rs/hr)
Cost
(Rs)
Rate
(Rs/hr)
Total 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

LEV/LUV =
({
AO
SO
× ST} − AT(N)) × SR
Using, LEV/LUVLab =
({
AO
SO
× STLab} − AT(N)Lab) × SRLab

Labour/Labour Efficiency/Usage Variance due to workers who are
• Skilled =
({
7,125 units
7,500 units
× 200 hrs} − 216 hrs) Rs. 20/hr
= ({0.95 × 200 hrs} − 216 hrs) × Rs. 20/hr
= ({190 hrs − 216 hrs) × Rs. 20/hr
= ({− 26 hrs) × Rs. 20/hr
= − Rs. 520 ⇒ LEV/LUVSk = − Rs. 520 [Adv]
• Semi-Skilled =
({
7,125 units
7,500 units
× 400 hrs} − 450 hrs) Rs. 15/hr
= ({0.95 × 400 hrs} − 450 hrs) × Rs. 15/hr
= ({380 hrs − 450 hrs) × Rs. 15/hr
= ({− 70 hrs) × Rs. 15/hr
= − Rs. 1,050 ⇒ LEV/LUVSe = − Rs. 1,050 [Adv]
• Unskilled =
({
7,125 units
7,500 units
× 150 hrs} − 198 hrs) Rs. 10/hr
= ({0.95 × 150 hrs} − 198 hrs) × Rs. 10/hr
= ({142.5 hrs − 198 hrs) × Rs. 10/hr
= ({− 55.5 hrs) × Rs. 10/hr
= − Rs. 555 ⇒ LEV/LUVUn = − Rs. 555 [Adv]
Total Labour/Labor Efficiency/Usage Variance ⇒ TLEV/TLUV = − Rs. 2,125 [Adv]

Solution [Using recalculated data]  
 
Where you find that the SO ≠ AO, you may alternatively recalculate the standard to make the SO = AO and use the figures relating to the recalculated standard in the working table. In such a case, the formulae that you use would look simpler (without the adjustment factor AO/SO).

From the data relating to the problem, it is evident that AO ≠ SO. Thus we recalculate the standard data for Actual Output [Refer to the calculations].

Consider the recalculated standard data and the actual data arranged in a working table.

Standard
[Production: 7,125 units]
Actual
[Production: 7,125 units]
Time
(hrs)
Rate
(Rs/hr)
Cost
(Rs)
Rate
(Rs/hr)
Gross/Total Net Abnromal
Time
(hrs)
Cost
(Rs)
Time
(hrs)
Cost
(Rs)
Time
(hrs)
Cost
(Rs)
Skilled 190 20 3,800 22 240 5,280 216 4,752 24 528
Semi Skilled 380 15 5,700 14 500 7,000 450 6,300 50 700
Un Skilled 142.5 10 1,425 12 220 2,640 198 2,376 22 264
Total 712.5   10,925   960 14,920 864 13,428 96 1,492

LEV/LUV = (ST − AT) × SR [Since AO = SO]

Using LEV/LUVLab = (STLab − AT(N)Lab) × SRLab [Since AO = SO]

Labour/Labor Efficiency/Usage Variance due to workers who are
• Skilled = (190 hrs − 216 hrs) × Rs. 20/hr
= − 26 hrs × Rs. 20/hr
= − Rs. 520 ⇒ LEV/LUVSk = − Rs. 520 [Adv]
• Semi-Skilled = (380 hrs − 450 hrs) × Rs. 15/hr
= − 70 hrs × Rs. 15/hr
= − Rs. 1,050 ⇒ LEV/LUVSe = − Rs. 1,050 [Adv]
• Unskilled = (142.5 hrs − 198 hrs) × Rs. 10/hr
= − 55.5 hrs × Rs. 10/hr
= − Rs. 555 ⇒ LEV/LUVUn = − Rs. 555 [Adv]
Total Labour/Labor Efficiency/Usage Variance ⇒ TLEV/TLUV = − Rs. 2,125 [Adv]

Note:

This formula can be used only when the standard output and the actual output are the same.

You don't need to recalculate the standard

The formula with the adjustment factor AO/SO can be used in all cases i.e. both when AO = SO and AO ≠ SO. Therefore, you don't need to rebuild the working table by recalculating the standards for the purpose of finding the variances.

Check:

The same problem was solved in both the cases above. The only difference being that in the second case, the data was considered by recalculating the Standard for Actual Output to make AO = SO.

Formulae using Inter-relationships among Variances  
 
These formulae can be used both for each labour/labor type separately as well as for all the labour/labor types together.
  1. LCV = LRPV + LEV/LUV + LITV   → (1)
    • For each Labour/Labour Type Separately

      LEV/LUVLab = LCVLab − LRPVLab − LITVLab
    • For all the Labour/Labour Types Together

      TLEV/TLUV = TLCV − TLRPV − TLITV
       

  2. LEV/LUV = LMV/GCV + LYV/LSUV   → (2)
    • For each Labour/Labor type Separately

      LEV/LUVLab = LMV/GCVLab + LYV/LSUVLab
    • For all the Labour/Labour Types Together

      TLEV/TLUV = TLMV/TGCV + TLYV/TLSUV

Verification

The interrelationships between variances would also be useful in verifying whether our calculations are correct or not. After calculating the three/four variances we can verify whether LEV/LUV, LRPV and LITV add up to LCV or not. If LEV/LUV + LRPV + LITV = LCV we can assume our calculations to be correct.

We used the same set of data in all the explanations. Using the figures obtained for verification.
LRPV + LEV/LUV + LITV = (+ Rs. 850) + (− 8,650)
= (− Rs. 7,800)
= LCV → We can assume our calculations to be correct.

Who's responsible for this variance  
 
Since this variance is on account of actual time worked being more or less than the standard time for actual output, the people or department responsible for production can be held responsible for this variance.

This conclusion would be comprehensive and final when there is only type of Labour/Labor in use.

When there are two or more types of labour/labor

When there are more than one Labour/Labor types in use for the manufacture of a product there would be two factors influencing the cost. One, the ratio in which the component Labour types are mixed and two the actual yield from the labour/labor time. That is the reason the Usage variance is further broken down into two parts called Mix Variance (Or) Gang Composition Variance and Yield Variance.

Alternative Formula  
 
If you think knowing too many possibilities would confuse you, ignore this, you wont need it.

That part of the variance in the total cost of labour/labor on account of a variation in the usage of labour/labor measure in terms of output.

It is the difference between the standard cost of actual output and the standard cost of standard output for actual (time mix) input.

Labour/Labor Efficiency/Usage Variance = Standard Cost of Actual Output − Standard Cost of Standard Output for Actual Input

  • For each Labour/Labor Type Separately

    LEV/LUVLab = SC of AO − SC of SO for AI
    =
    (AO × SR(SO)Lab) − ({
    ATLab
    STLab
    × SO} × SR(SO)Lab)
    =
    (AO − ({
    ATLab
    STLab
    × SO}) × SR(SO)Lab)

    SR(SO)Lab =
    SCLab
    SO
    =
    STLab × SRLab
    SO

  • For all Labour/Labor Types Together

    There is no direct formula

Note:

  1. This formula can be used in all cases.

Solution [Using the data as it is]  
 
For working out problems with the data consider as it has been given without having to do any recalculations, use the above formulae (which are capable of being used in all cases)

Considering the data given above:

Standard
[Production: 7,500 units]
Actual
[Production: 7,125 units]
Time
(hrs)
Rate
(Rs/hr)
Cost
(Rs)
Rate
(Rs/hr)
Total 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
Using, SR(SO)Lab =
STLab × SRLab
SO

• SR(SO)Sk =
200 hrs × Rs. 20/hr
7,500 units
=
Rs. 4,000
7,500 units
⇒ SR(SO)Sk =
Rs.
8
15
/unit

• SR(SO)Se =
400 hrs × Rs. 15/hr
7,500 units
=
Rs. 6,000
7,500 units
⇒ SR(SO)Se = Rs. 0.80/unit

• SR(SO)Un =
150 hrs × Rs. 10/hr
7,500 units
=
Rs. 1,500
7,500 units
⇒ SR(SO)Un = Rs. 0.20/unit

Using, LEVLEV/LUVLab =
(AO − {
AT(N)Lab
STLab
× SO}) × SR(SO)Lab

Labour/Labor Efficiency/Usage Variance due to labour/labor type which is
• Skilled =
(7,125 units − {
216 hrs
200 hrs
× 7,500 units}) × Rs.
8
15
/unit
=
(22,800 units − 23,750 units) ×
Rs. 27
19
/unit
= − Rs. 520 ⇒ LEV/LUVSk = − Rs. 520 [Adv]
• Semi-Skilled =
(7,125 units − {
450 hrs
400 hrs
× 7,500 units}) × Rs. 0.80/unit
= (7,125 units − 8,437.50 units) × Rs. 0.80/unit
= − Rs. 1,050 ⇒ LEV/LUVSe = − Rs. 1,350 [Adv]
• Unskilled =
(7,125 units − {
198 hrs
150 hrs
× 7,500 units}) × Rs. 0.20/unit
= (7,125 units − 9,90 units) × Rs. 0.20/unit
= − Rs. 555 ⇒ LEV/LUVUn = − Rs. 555 [Adv]
Total Labour/Labor Efficiency/Usage Variance ⇒ TLEV/TLUV = − Rs. 2,125 [Adv]

Note that you get the same values for variances whatever may be the formula you use.

Author Credit : The Edifier ... Continued Page L:9

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