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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.The problem data arranged in a working table:
What is the variation in total cost on account of efficiency/ineffciency in the usage of labour/labor?
|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.
|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.
|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:
Labour/Labour Efficiency/Usage Variance due to workers who are
|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.
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
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 standardThe 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.
VerificationThe 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.
|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/laborWhen 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.
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
|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:
Labour/Labor Efficiency/Usage Variance due to labour/labor type which is
Note that you get the same values for variances whatever may be the formula you use.
|Author Credit : The Edifier||... Continued Page L:9|