Labour/'Labor Variances :: Reconciliation

How to Reconcile? The Method

Preparation of a reconciliation statement requires you to start with one of the two costs/values you intend to reconcile and arrive at the other cost/value by adjusting (adding or subtracting) the variances involved. You may follow the following steps to create the format for the statement. Consider the two costs/values you intend to reconcile Say, SC of ST for AO (Standard Cost of Standard Time for Actual Output) and AC (Actual Cost) Identify the formula involving these two costs and a variance The variance would be the difference of the two costs that you have to reconcile. If you are considering SC of ST for AO and AC, then it would be LCV = (SC of ST for AO) − AC. Make the Cost you have to arrive at, the Subject of the Formula The subject of a formula is that variable which is defined in terms of the other variables in the formula. By convention we place the subject on the LHS with a positive sign. LCV = (SC of ST for AO) − AC     ⇒ LCV is the Subject AC = (SC of ST for AO) − LCV     ⇒ AC is the Subject SC of ST for AO = LCV + AC     ⇒ SC of ST for AO is the Subject In making reconciliation statements we start with one cost/value and make adjustments to arrive at another cost/value. The cost other than the cost that you start with would be made the subject of the formula. Say, if we are to start with "SC of ST for AO" and arrive at "AC" then the rewritten formula would be AC = (SC of ST for AO) − LCV Alternatively, if we are to start with "AC" and arrive at "SC of ST for AO" then the rewritten formula would be SC of ST for AO = AC + LCV Draw the Statement using the rewritten formula The logical flow of the statement from top to bottom can be interpreted from the terms on the RHS of the re-written formula. (SC of ST for AO) − LCV = AC Statement of reconciliation Particulars Amount Amount Standard Cost (of Standard Time for Actual Output)   xx (Less/(−)) Labour/Labor Cost Variance   xx Actual Cost   xx Note: The Negative sign indicating deduction here is distinct from the sign that you attribute to Cost variance at the time of finding the variance. The Cost Variance should be considered along with its sign (+ if it is positive and − if it is negative). Where there are two or more labour/labor types involved in the production process Statement of reconciliation of Labour/Labor Cost Particulars Amount Amount Standard Cost (of Standard Time for Actual Output)   xx (Less/(−)) Labour/Labor Cost Variance:   xx Skilled xx   Semi - Skilled xx xxx Actual Cost   xx SC of ST for AO = AC + LCV Statement of reconciliation Particulars Amount Amount Actual Cost   xx (Add/(+)) Labour/Labor Cost Variance   xx Standard Cost (of Standard Time for Actual Output)   xx Where there are two or more labour/labor types involved in the production process Statement of reconciliation of Labour/Labor Cost Particulars Amount Amount Actual Cost   xx (Add/(+)) Labour/Labor Cost Variance:   xx Men xx   Women xx   Boys xx xxx Standard Cost (of Standard Time for Actual Output)   xx Note: The Positive sign indicating addition here is distinct from the sign that you attribute to Cost variance at the time of finding the variance. The Cost Variance should be considered along with its sign (+ if it is positive and − if it is negative). This is the method adopted for reconciling the costs with the help of data relating to one variance. The variance that we use would be the difference of the two costs given.

Reconciliation using Data Relating to More than one variance

Consider the two costs/values you intend to reconcile Say, SC of ST for AO (Standard Cost of Standard Time for Actual Output) and AC (Actual Cost) Identify the formula involving these two costs and a variance The variance would be the difference of the two costs that you have to reconcile. If you are considering SC of ST for AO and AC, then it would be LCV = (SC of ST for AO) − AC. Rewrite the variance in terms of other variances whose data is known To be able to do this, we need to know the interrelationships between the variances. We need to identify the relationship which gives the variance in terms of the variances whose data is given. LCV = LRPV + LEV/LUV     ⇒ LRPV = LCV − LEV/LUV. Thus, LRPV = (SC of AT) − AC. ⇒ LCV − LEV/LUV = (SC of AT) − AC. Make the Cost you have to arrive at, the Subject of the Formula The subject of a formula is that variable which is defined in terms of the other variables in the formula. By convention we place the subject on the LHS with a positive sign. In making reconciliation statements we start with one cost/value and make adjustments to arrive at another cost/value. The cost other than the cost that you start with would be made the subject of the formula. If we are to start with "SC of AT" and arrive at "AC" then the rewritten formula would be AC = (SC of AT) − LCV + LEV/LUV     ⇒ SC of AT is the Subject of the Formula If we are to start with "AC" and arrive at "SC of AT" then the rewritten formula would be (SC of AT) = LCV − LEV/LUV + AC     ⇒ SC of AT is the Subject of the Formula Draw the Statement using the rewritten formula The logical flow of the statement from top to bottom can be interpreted from the terms on the RHS of the re-written formula. (SC of AT) = LCV − LEV/LUV + AC ⇒ (SC of AT) = AC + LCV − LEV/LUV (SC of AT) = AC + LCV − LEV/LUV Statement of reconciliation Particulars Amount Amount Actual Cost   xx (Add/(+;)) Labour/Labor Cost Variance:     Skilled xx   Semi-Skilled xx xxx (Less/(−)) Labour/Labor Efficiency/Usage Variance:   xx Skilled xx   Semi-Skilled xx xxx Standard Cost of Actual Time   xx Note: The Positive/Negative signs indicating addition/deduction here is distinct from the sign that you attribute to variances at the time of finding the variance. The Variances should be considered along with their sign (+ if it is positive and − if it is negative).

Costs to Reconcile » Variances to be Considered

The variance that you take into consideration is that variance which can be obtained as a difference of the two costs that you have to reconcile. To reconcile LCV = (SC of ST for AO) − AC(G) SC of ST for AO &rATuo; Standard Cost of Standard Time for Actual Output AC(G) &rAquo; Actual Cost (of Gross Time) LCV &rAquo; Labour/Labor Cost Variance LRPV = (SC of AT) − AC(G) SC of AT &rATuo; Standard Cost of Actual Time AC(G) &rAquo; Actual Cost (of Gross Time) LRPV &rAquo; Labour/Labor Rate of Pay Variance LEV/LUV(G) = (SC of ST for AO) − (SC of AT(G)) SC of ST for AO &rATuo; Standard Cost of Standard Time for Actual Output SC of AT(G) &rATuo; Standard Cost of Actual Gross Time LEV/LUV(G)) &rAquo; Labour/Labor Gross Efficiency/Usage Variance LEV/LUV(N) = (SC of ST for AO) − (SC of AT(N)) SC of ST for AO &rAquo; Standard Cost of Standard Time for Actual Output SC of AT(N) &rAquo; Standard Cost of Actual Net Time LEV/LUV(N)) &rAquo; Labour/Labor Net Efficiency/Usage Variance LMV/GCV = (SC of ST for AI) − (SC of AT) SC of ST for AI &rAquo; Standard Cost of Standard Time for Actual Input SC of AT &rAquo; Standard Cost of Actual Time LMV/GCV &rATuo; Labour/Labor Mix/Gang-Composition Variance LYV/LSEV/LSUV = (SC of SO for AI) − (SC of AO) SC of ST for AI &rATuo; Standard Cost of Standard Time for Actual Input SC of AO &rATuo; Standard Cost of Actual Output LYV/LSEV/LSUV/MSUV &rATuo; Labour/Labor Yield/Sub-Efficiency/Sub-Usage Variance Note: You should be able to notice that Labour/Labor Idle Time Variance (LITV) is missing from the above. This is for the reason that LITV is found out just as a value and not as a difference between two values. However, LITV can appear as a part of a reconciliation statement when a variance is written in terms of other variances, like LCV = LRPV + LEV + LITV

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