Calculate Labor/Labour Variances.

Working table populated with the information that can be obtained as it is from the problem data

Output (_O) is in units, Times (_T) are in hrs, Rates (_R) are in monetary value per unit time and Costs (_C) are in monetary values.

The rest of the information that we make use of in problem solving is filled through calculations.

It is the difference between the standard cost for actual output and the standard cost of productive labour/labor time.

⇒ Labour/Labor Efficiency Variance (LEV)

Standard Cost for Actual Output

Standard Cost of Productive Time

Formula in useful forms

Note

• ×

  AO

  SO

  replaces the suffix (AO) in calculations

For each Labour/Labor Type Separately

Labour/Labor Efficiency variance for a labour/labor type

For all Labour/Labor Types together

Total Labour/Labor Efficiency Variance

Labour/Labor Efficiency variance for the Mix

TLEV = LEV_Mix, when LEV_Mix can be calculated.

3. SC(AO) = ST(AO) × SR

4. PT = AT − IT

5. SC(PT) = PT × SR

6. SO(AO) = AO

LEV = SC(AO) − SC(PT)

Labour/Labor Efficiency Variance due to

Alternative

• Calculating Costs in a working table

  Calculate SC and SC(PT) based on the given data in a working table and then use formulae based on costs.

  	Standard			Actual
  	for SO			Total		Idle	Productive
  	ST	SR	SC	AT	AR	IT	PT	SC(PT)
  Skilled Semi-Skilled Unskilled	200 400 150	20 15 10	4,000 6,000 1,500	240 500 220	22 14 12	20 36 34	220 464 186	4,400 6,960 1,860
  Total	750		11,500	960		90	870	13,220
  Output	7,500 SO			7,200 AO

  1. SC = ST × SR

  2. SC(PT) = PT × SR

  LEV

  =

  SC × AO SO − SC(PT)

• Using Formula with Time and Rate

  Using the time and rate data from the working table built using the problem data we may do all the working in the formula itself if we expand the formula using the relation cost = time × rate.

  	Standard			Actual
  	for SO			Total		Idle
  	ST	SR	SC	AT	AR	IT
  Skilled Semi-Skilled Unskilled	200 400 150	20 15 10		240 500 220	22 14 12	20 36 34
  Total	750		11,500	960		90
  Output	7,500 SO			7,200 AO

  LEV = (ST ×

  AO

  SO

  − PT) × SR

  LEV	=	[ST × AO SO − PT] × SR
  	=	[ST × AO SO − (AT − IT)] × SR

  Since this formula involves the term PT × SR and PTMR ≠ STMR, it cannot be used for calculating the variance for the Mix

• Why Productive Time?

  LUV/LGEV measures efficiency taking the total labour/labor time into consideration.

  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 abnormal reasons would be dealt with separately and LEV wishes to measure only the level to which the worker performs his work during the time he/she works.

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

  Where there is no idle time loss, actual time and productive time would be the same.

• 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.

  Wages are to be paid to the workers for all the hours they work (both normal hours and abnormal idle hours). A variation in rate of pay would result in a gain or loss on account of all hours being paid for. Thus in measuring rate of pay variance total time is considered.

• Nature of Variance

  Based on the relations derived from the formulae for calculating LEV, we can identify the nature of Variance

  • SC(AO) ___ SC(PT)
  • ST(AO) ___ PT

  LEV_Lab

  • SC(AO)_Lab ___ SC(PT)_Lab
  • ST(AO)_Lab ___ PT_Lab

  LEV_Mix

  • SC(AO)_Mix ___ SC(PT)_Mix
  • ST(AO)_Mix ___ PT_Mix (conditional)

    only when STMR = PTMR.

  The variance would be

  • zero when =
  • Positive when >
  • Negative when <

  TLUV/TLGEV

  Variance of Mix and Total Variance are the same.

  Variance_Mix provides a method to find the total variance through calculations instead of by just adding up individual variances.

• Interpretation of the Variance

  For each labour/labor type, for the output achieved

  Variance	Productive Time input is	indicating
  None	as per standard	efficiency
  Positive	lesser than standard	efficiency
  Negative	greater than standard	inefficiency

  Similar conclusions can be drawn for the mix based on the mix variance. However, it should be noted that the mix variance is an aggregate of individual variances and as such reflects their net effect.

  Mix variance data would be helpful to get an overall idea only. It would not be as useful as individual variances data in taking corrective actions.

  Eg: When the Total Variance is zero, we cannot conclude that the cost incurred on all labour/labor types is as per standard, as it might have been zero on account of

  1. each labour/labor type variance being zero, or
  2. 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.

• Who is answerable for the Variance?

  Since this variance is on account of the productive labour/labor time used being more or less than the standard, the people or department responsible for production can be identified as the ones answerable for this variance.

• LEV = LUV/LGEV − LITV
• LEV = LMV/GCV + LYV/LSEV

Verification

Building a table as below would help

By including a column for formula, this format would also work as the simplest format for calculating and presenting variances after building the working table