Labour/Labor Variances :: Cost Accounting Treatment

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Cost Accounting  
 
Transactions involving Costs (those which have a relevance in cost accounting) are recorded in two different methods.
  1. Cost Ledger Accounting

    Separate records/books are maintained for cost accounting independent of the financial accounting.

    Each of these records are self balancing i.e. a trial balance (list of ledger account balances) can be prepared independently for each set of books and the trial balance should agree in the absence of any errors.

  2. Integrated Accounting

    Integrated Ledgers where the cost accounting and financial accounting transactions are integrated and maintained in the same set of books.

    Since there is only one set of books, if at all a trial balance is prepared, it would contain all the ledger accounts (balances) we come across in cost accounting as well as financial accounting.

Recording, Posting » Transactions involving Labour/Labor  
 
Transactions involving labour/labor and their accounting treatment in Costing Accounting Records

Assumption ::

A separate set of cost ledgers are being maintained for recording the transactions relevant to costing.

Transactions

  1. Wages paid or outstanding
  2. Direct Labour/Labor worked
  3. Indirect Labour/Labor worked for Factory
  4. Abnormal Idle Time (Loss of Labour/Labor)

There may be other transactions involving labour/labor. We are limiting the discussion to only those transactions which would aid our understanding of this topic.

Ledger Accounts affected by the Transactions

  1. WLC » Wage Ledger Control a/c
        [Used to record the incurrence and allocation of the labour/labor costs.]
  2. WIP » Work In Progress a/c
        [Used to record cost upto works costs i.e. (direct costs and factory overheads)]
  3. FOHC » Factory Overhead Control a/c
        [Used to record the factory overheads.]
  4. CP&L » Costing Profit and Loss a/c
        [Used to record the gross profit and the profits and gains of abnormal nature.]
  5. GLA » General Ledger Adjustment a/c
        [Used to record the transactions whose information is derived from financial accounts.]

Journal Entries

Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
01. Dr
xxx
xxx
[For the wages incurred (paid or outstanding]
02. Dr
xxx
xxx
[For the amount of wages to be treated as Driect Wages]
03. Dr
xxx
xxx
[For the amount of wages treated as Factory overheads]
04. Dr
xxx
xxx
[For the amount of wages relating to abnormal loss time]

Ledger Posting

DrWage Ledger Control a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

01.
 

To GLA a/c
 


 

xxxxx
 

02.
03.
04.

By WIP a/c
By FOHC a/c
By C P/L a/c
 




xxx
xxx
xxx

Variances Accounted For  
 
All the variances i.e. Labour/Labor - Rate of Pay, Mix/Gang-Composition, Idle Time and Yield variances are accounted for. Note that Efficiency/Usage Variance is the sum of Mix/Gang-Composition and Yield Variances and Cost Variance is the sum of Rate of Pay, Idle Time and Efficiency/Usage Variances.

Ledger Accounts Used

The ledger accounts that are used for recording transactions relating to labour/labor variances are
  • Labour/Labor Rate of Pay Variance a/c
  • Labour/Labor Idle Time Variance a/c
  • Labour/Labor Gross Efficiency/Usage Variance a/c
  • Labour/Labor Net Efficiency/Usage Variance a/c
  • Labour/Labor Mix/Gang-Composition Variance a/c
  • Labour/Labor Yield Variance a/c
  • Labour/Labor Cost Variance a/c

When (at what point?) are the variances Identified?

  • Rate of Pay Variance

    1. The variance in relation to the rate at which wages are paid or payable is identified at the time of recording the wages incurred/due in the cost ledgers.

  • Idle Time Variance

    The wages for the total time spent by labourers/laborers is classified as direct labour/labor or indirect labour/labor depending on how the labourers/laborers are used is and transferred to the relevant account.
    1. The variance relating to the idle time included within the time that has not been so classified is identified at the time of such classification and transfer.
    2. The variance relating to the idle time included within the time that has been classified and transferred to overhead control account as indirect labour/labor can be identified at any time.
    3. The variance relating to the idle time included in the time that has been classified and transferred to production (work-in-progress) as direct labour/labor is identified at the any time.

  • Mix/Gang-Composition Variance

    The mix variance arises only when there are two or more labour/labor types involved in the production process.
    1. Where all the constituent labour/labor types in total are allocated for production at the same time, the mix/gang-composition variance is identified at the time of classification and transfer of wages to the production processes.
    2. Where the constituent labour/labor types are decided at the time of actually employing the labour/labor to the production process, this variance is identified after completion of production process i.e. at the time of transfer of completed production to finished goods stock.

  • Yield/Sub-Efficiency/Sub-Usage Variance

    The yield/sub-efficiency/sub-usage variance can be identified after completion of the production process i.e. at the time of transfer of completed production to the finished goods stock.

  • Efficiency/Usage Variance a/c

    Where we identify the mix/gang-composition and yield/sub-efficiency/sub-usage variances, Efficiency/Usage Variance would be nothing but the sum of mix and yield variances.

    Where we do not identify the mix/gang-composition and yield/sub-efficiency/sub-usage variances separately Efficiency/Usage Variance is identified after completion of production process i.e. at the time of transfer of completed production to finished goods stock.

    We may deliberately avoid identifying the mix/gang-composition and yield/sub-efficiency/sub-usage variances in which case we use the formula for calculating the Efficiency/Usage variance. Mix/gang-composition and yield/sub-efficiency/sub-usage variances are not thought of when there is only one labour/labor type used in the production process (in which case all the net efficiency/usage variance is nothing but yield/sub-efficiency/sub-usage variance.)

  • Cost Variance

    Where we identify the Rate of Pay, Gross Efficiency/Usage, Net Efficiency/Usage and Idle Time variances, Cost Variance would be nothing but the sum of
    • The Rate of Pay, Net Efficiency/Usage and Idle Time Variances
      (Or)
    • The Rate of Pay and Gross Efficiency/Usage Variances

    Where we do not identify the Rate of Pay, Gross Efficiency/Usage, Net Efficiency/Usage and Idle Time variances separately, cost variance is identified after completion of production process i.e. at the time of transfer of completed production to finished goods stock. We use the formula for calculating the Cost variance in such cases.

Variance :: Normal/Abnormal  
 
The variance is considered to be normal when the deviation of the actual from the standard is found to be on account of acceptable/normal reasons. Such a situation can be compared to a situation where there is a need for a revision in standards. It indicates the variance that should be accepted and absorbed into cost.

Any variance or a part of the variance which is avoidable and would not have occurred under normal circumstances is abnormal variance.

Say for example,

  • Rate of Pay Variance

    Standard Wage Rate = Rs. 8/hr; Actual Price = Rs. 10.50/hr;
    Actual Time Worked = 1,000 hrs.
    There was a revision of minimum wages as per the agreement between the management and the labour/labor unions and the new wage rate accepted upon is Rs. 10/hr. Since the variance on account of revision in wage rates is on account of revision in agreeements with the labourers/laborers, it is acceptable.

    Labour/Labor Rate of Pay Variance AT(G) (SR − AR)

    • Before revision = 1,000 hrs (Rs. 8/hr − Rs. 10.50/hr) ⇒ LRPV = − Rs. 2,500.
    • After revision = 1,000 hrs (Rs. 10/hr − Rs. 10.50/hr) ⇒ LRPV = − Rs. 500.

    Of the initial variance (− Rs. 2,500) identified, − Rs. 500 is abnormal and the rest − Rs. 2,000 is to be regarded as normal.

  • Mix/Gang-Composition Variance

    There is a revision in the ratio in which the labour/labor types are to be mixed on account of shortage of semi-skilled labourers/laborers.
    Labour/Labor Mix/Gang-Composition Variance before revising the standard is + Rs. 2,400.
    After revising the standards the mix variance turns out to be + Rs. 800.

    The variance measured using the new standards would be the real variance which should not have been there and is thus abnormal. Anything other than that is acceptable and is normal. Thus, + Rs. 1,600 of the variance is normal and + Rs. 800 is abnormal.

  • Yield Variance

    There is a change in the method of production, whereby each hour of production time yielded 12 units compared to the original standard which indicates a yield of 15 units per hour.
    Labour/Labor Yield Variance as per the original standard is − Rs. 1,000. But when the standard is revised the yield variance turns out to be + Rs. 600.

    Therefore, − Rs. 1,600 of the variance is normal and + Rs. 600 is abnormal.

Treatment of Normal and Abnormal Parts of the Variances  
 
In adjusting the normal part of the variance appropriately we need to identify that part of the normal variance which influences the wages cost included in
  1. Closing Work in Progress » Is adjusted to "Work-In-Progress a/c"
  2. Closing Finished Goods » Is adjusted to "Finished Goods Ledger Control a/c"
  3. Cost of Goods Sold » Is adjusted to "Cost of Sales a/c"

No adjustment is made with regard to the abnormal part of the variance and it is eliminated from accounting completely

Accounting Treatment

The treatment/adjustment of normal and abnormal parts of the variance with respect to each ledger account is as follows:
  • Rate of Pay Variance

    The total Rate of Pay variance appears as a debit balance in the "Labour/Labor Rate of Pay Variance a/c" and
    • The normal part of the variance is apportioned between WIP a/c, FGLC a/c and CGS a/c.
    • The abnormal part is transferred/adjusted to "LCV a/c"

  • Mix/Gang-Composition Variance

    The total Mix/Gang-Composition variance appears as a debit balance in the "Labour/Labor Mix/Gang-Composition Variance a/c" and
    • The normal part of the variance is apportioned between WIP a/c, FGLC a/c and CGS a/c.
    • The abnormal part is transferred/adjusted to "LEV/LUV a/c"

  • Yield Variance

    The total Yield/Sub-Efficiency/Sub-Usage variance appears as a debit balance in the "Labour/Labor Yield/Sub-Efficiency/Sub-Usage Variance a/c" and
    • The normal part of the variance is apportioned between WIP a/c, FGLC a/c and CGS a/c.
    • The abnormal part is transferred/adjusted to "LEV/LUV(N) a/c"

  • Net Efficiency/Usage Variance

    This is a consolidation account. It represents the total of the abnormal parts of the mix/gang-composition and yield/sub-efficiency/sub-usage variances. Since the total balance represents abnormal variance, it is adjusted/transferred to "LEV/LUV(G) a/c"

    Where the Mix/Gang-Composition and Yield/Sub-Efficiency/Sub-Usage variances are not identified separately the Net Efficiency/Usage Variance id directly identified using a formula. In such cases, the "LEV/LUV(N) a/c" is not a consolidation account. The total Effciency/Usage variance appears as a debit balance in the "Labour/Labor Net Efficiency/Usage Variance a/c" and

    1. The normal part of the variance is apportioned between WIP a/c, FGLC a/c and CGS a/c.
    2. The abnormal part is transferred/adjusted to "LEV/LUV(G) a/c"
  • Idle Time Variance

    The total Idle time variance appears as a debit balance in the "Labour/Labor Idle Time Variance a/c" and
    • The total variance being abnormal is transferred/adjusted to "LEV/LUV(G) a/c"

  • Gross Efficiency/Usage Variance

    This is a consolidation account. It represents
    • The total of the abnormal parts of the Net Efficiency/Usage and Idle Time variances.
      (Or)
    • The total of the abnormal parts of the mix/gang-composition, yield/sub-efficiency/sub-usage and Idle time variances.

    Since the total balance represents abnormal variance, it is adjusted/transferred to "LCV a/c"

    Where the Mix/Gang-Composition, Yield/Sub-Efficiency/Sub-Usage variance and Idle time variances are not identified separately the Gross Efficiency/Usage Variance id directly identified using a formula. In such cases, the "LEV/LUV(G) a/c" is not a consolidation account. The total Effciency/Usage variance appears as a debit balance in the "Labour/Labor Gross Efficiency/Usage Variance a/c" and

    1. The normal part of the variance is apportioned between WIP a/c, FGLC a/c and CGS a/c.
    2. The abnormal part is transferred/adjusted to "LCV a/c"

  • Cost Variance

    This is a consolidation account. It represents
    • The total of the abnormal parts of Rate of Pay, Gross Efficiency/Usage variances.
      (Or)
    • The total of the abnormal parts of the Rate of Pay, Net Efficiency/Usage and Idle time variances.
      (Or)
    • The total of the abnormal parts of the Rate of Pay, mix/gang-composition, yield/sub-efficiency/sub-usage and Idle time variances.

    Since the total balance represents abnormal variance, it is adjusted/transferred to "Costing P&L a/c."

    Where the Rate of Pay Variance, Yield/Sub-Efficiency/Sub-Usage variance and Idle time variances are not identified separately the Cost Variance is directly identified using a formula. In such cases, the "LCV a/c" is not a consolidation account. The total Cost variance appears as a debit balance in the "Labour/Labor Cost Variance a/c" and

    1. The normal part of the variance is apportioned between WIP a/c, FGLC a/c and CGS a/c.
    2. The abnormal part is transferred/adjusted to "Costing P &L a/c"

Note

  • Adjustment of normal part of the variance may result in the relevant variance account being either debited or credited depending on the nature of the variance being adjusted.
  • Adjustment of normal part of the rate of pay, mix/gang-composition, yield variances influences the WIP a/c, FGLC a/c, COS a/c.
  • Idle Time Variance does not have a normal part to be adjusted
  • Where Efficiency/Usage Variance a/c and Cost Variance a/c are consolidation accounts, the variance transferred to them from other accounts is only abnormal, they do not have normal variance to be transferred/treated.
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