Labour/Labor Variances :: Overview

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Interpretation of Variance  
 

Mathematical Interpretation

The variances that we calculate are all value variances i.e. any Variance that we calculate is the difference between two values.
Variance = Value1 − Value2
Variance = (Time1 × Rate1) − (Time2 × Rate2)   [Since Wage Cost = Time × Wage Rate.]

Adverse/Negative/Unfavourable Variance

The variance is said to be either negative (−) or Adverse (Adv) or Unfavourable (Unf) if it indicates a loss.

  • In relation to costs, we would incur a loss if the actual cost is greater than the standard cost.
  • In relation to profits or incomes, we would incur a loss if the actual profit or income is less than the standard.

This type of variance is indicated by either a negative sign (−) placed before the value of the variance or by writing the letters UF or Unf or Adv after the value.

Positive/Favourable Variance

The variance is said to be either Positive (+/Pos) or Favourable (Fav) if it indicates a gain position or beneficial position.
  • In relation to costs, we would gain if the actual cost is less than the standard cost.
  • In relation to profits or incomes, we would gain if the actual profit or income is greater than the standard.

This type of variance is indicated by either a positive sign (+) placed before the value of the variance or by writing the letters Fav or F or Pos after the value.

Variance Formulae » Standard − Actual (Or) Actual − Standard ??  
 
Many a times students would get struck up with deciding whether the standard data comes first or the actual data. The basic idea behind all variances being Variance = Value 1 − Value 2, the standard value should come first in case of cost variances and the actual value should come first in case of sales variances.

To have a clear understanding assume an example and spend a few seconds to think over and decide every time you are in doubt. Never mug it up. The below explanation is given as an aid.

Sstandard cost is Rs. 2,000 and the actual cost is Rs. 2,400.
This should indicate a negative variance.
How do you get a negative sign? 2,400 − 2,000 or 2,000 − 2,400.
Surely, it would be 2,000 − 2,400
Thus it should be Standard Cost − Actual Cost.

Standard income is Rs. 2,500 and the actual income is Rs. 3,000.
This should indicate a positive variance.
How do you get a positive sign? 2,500 − 3,000 or 3,000 − 2,500.
Surely, it would be 3,000 − 2,500
Thus it should be Actual Income − Standard Income.

Labour/Labor Variances  
 
The variance in the cost of labour/labor i.e. the difference between the standard cost of labour/labor for actual output and the actual cost of labour/labor would give the variance on account of labour/labor. We call this the "Labour/Labor Cost Variance".

This would give an idea of how much more or less cost had been incurred when the actuals are compared to plans. However, it does not give a scope for pin pointing the responsibility for the variance and thereby take corrective actions.

We cannot identify whether the variance is on account of more or less wage rate being paid (in which case, the department having the authority to fix wage rates should be held responsible) or on account of more or less labor/labour time being used for production (in which case the production department should be held responsible) etc.

Therefore to enable derivation of data that would be useful, labour/labor cost variance is analysed further into its constituent parts.

Labour/Labor Cost Variance as a Synthesis of its Constituent Variances  
 
The analysis of labour/labor cost variance into its constituent parts gives an idea of the labour/labor variance in various other angles. This possibility for anlaysis arises on account of the fact that labour/labor cost is a product of (thereby is influence by) two factors, i.e. the time for which the labourers/laborers work and the wage rate paid for labour/labor.

All the variances involving labour/labor which are collectively called "Labour/Labor variances" and their inter relationships are depicted in the illustration below:

LCV
Labour/Labor Cost Variance
 
   
LRPV
Labour/Labor
Rate of Pay Variance
LEV/LUV
Labour/Labor
Efficiency/Usage Variance
LITV
Labour/Labor
Idle Time Variance
 
 
LYV/LSUV
Labour/Labor Yield Variance
(Or) Sub Usage/Efficiency Variance
LMV/LGCV
Labour/Labor Mix Variance
(Or) Gang Composition Variance

This can be understood as the "Labour/Labor Cost Variance" broken down into its constituent parts and the constituent parts further broken down wherever possible.

Inter-relationships

The inter-relationships as can be interpreted from the above illustration are

• LCV = LRPV + L(N)UV/L(N)EV + LITV   → (1)
• L(N)UV/L(N)EV = LMV/GCV + LYV/LSUV   → (2)
• LCV = LRPV + LMV/GCV + LYV/LSUV   → (3) [From (1) and (2)]

These inter-relationships can be useful in problem solving for deriving the required answers as well as in checking for the correctness of answers.

Synthesis of Labour/Labor Cost Variance (alternative)  
 
There is an alternative method of breaking down the labour/labor cost variance into various constituent variances wherein an additional information is available in the form of Gross Efficiency Variance.

Calculation of other variances is not affected by this difference in classification. The only difference would be availability of additional information in the form of Gross Efficiency Variance.

The variances involving labour/labor which are collectively called "Labour/Labor variances" and their inter relationships under this classification are depicted in the illustration below:

LCV
Labour/Labor Cost Variance
 
 
LRPV
Labour/Labor
Rate of Pay Variance
L(G)EV/L(G)UV
Labour/Labor Gross
Efficiency/Usage Variance
 
 
L(N/R)EV
Labour/Labor (Net/Revised)
Usage/Efficiency Variance
LITV
Labour/Labor
Idle Time Variance
 
 
LYV/LSUV
Labour/Labor Yield Variance
(Or) Sub Usage/Efficiency Variance
LMV/LGCV
Labour/Labor Mix Variance
(Or) Gang Composition Variance

This can be understood as the "Labour/Labor Cost Variance" broken down into its constituent parts and the constituent parts further broken down wherever possible.

Inter-relationships

The inter-relationships as can be interpreted from the above illustration are

• LCV = LRPV + L(G)UV/L(G)EV   → (1)
• L(G)UV/L(G)EV = L(N)UV/L(N)EV + LITV   → (2)
• L(N)UV/L(N)EV = LMV/GCV + LYV/LSUV   → (3)
• LCV = LRPV + LMV/GCV + LYV/LSUV   → (4) [From (2) and (3)]

These inter-relationships can be useful in problem solving for deriving the required answers as well as in checking for the correctness of answers.

Author Credit : The Edifier ... Continued Page L:6

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