Labour Variances

Labour variances refer to the differences between the standard labour cost and the actual labour cost incurred during production. These variances help management evaluate labour efficiency, wage control, and productivity. Labour variance analysis enables organizations to identify the reasons for deviations and take corrective actions to improve performance and reduce costs.

A labour variance may be:

• Favourable (F): Actual labour cost is less than standard labour cost.
• Adverse or Unfavourable (A): Actual labour cost is more than standard labour cost.

Classification of Labour Variances

Labour Cost Variance (LCV)
            ↓
   ┌────────────────┐
   ↓                ↓
Labour Rate      Labour Efficiency
Variance (LRV)   Variance (LEV)
                         ↓
              ┌──────────────────┐
              ↓                  ↓
      Labour Mix Variance   Labour Idle Time Variance

1. Labour Cost Variance (LCV)

Labour Cost Variance (LCV) is the difference between the standard labour cost of actual production and the actual labour cost incurred during production.

It measures the overall effect of changes in:

• Labour wage rates, and
• Labour efficiency.

Labour Cost Variance helps management determine whether labour costs are being controlled effectively and whether employees are performing according to established standards.

Definition

Labour Cost Variance is the difference between:

Standard Labour Cost – Actual Labour Cost

Formula

LCV = (SH×SR) − (AH×AR)

Where:

• SH = Standard Hours for actual output
• SR = Standard Rate per hour
• AH = Actual Hours worked
• AR = Actual Rate per hour

Alternative Formula

LCV = LRV + LEV

Where:

• LRV = Labour Rate Variance
• LEV = Labour Efficiency Variance

Interpretation of Labour Cost Variance

Favourable Variance (F)

When:

Standard Labour Cost > Actual Labour Cost

This means labour costs are lower than expected.

Adverse or Unfavourable Variance (A)

When:

Actual Labour Cost > Standard Labour Cost

This means labour costs are higher than expected.

Example 1

Standard Data

• Standard Hours = 100 hours
• Standard Rate = ₹50 per hour

Standard Labour Cost:

100 × 50 = ₹5,000

• Actual Hours = 110 hours
• Actual Rate = ₹55 per hour

Actual Labour Cost:

110 × 55 = ₹6,050

Labour Cost Variance

LCV = ₹5,000−₹6,050

$$=₹1,050(A)$$

Thus, the company incurred an Adverse Labour Cost Variance of ₹1,050.

Example 2

Standard Data

• Standard Hours = 200 hours
• Standard Rate = ₹80 per hour

Standard Labour Cost:

200 × 80 = ₹16,000

Actual Data

• Actual Hours = 190 hours
• Actual Rate = ₹75 per hour

Actual Labour Cost:

190 × 75 = ₹14,250

Labour Cost Variance

LCV = ₹16,000 − ₹14,250

$$=₹1,750(F)$$

Thus, the company earned a Favourable Labour Cost Variance of ₹1,750.

Causes of Favourable Labour Cost Variance

• Lower wage rates than standard.
• Efficient workers.
• Better supervision.
• Reduced idle time.
• Improved production methods.
• Proper employee training.
• Increased labour productivity.
• Efficient utilization of manpower.

Causes of Adverse Labour Cost Variance

• Payment of higher wage rates.
• Overtime premiums.
• Inefficient workers.
• Machine breakdowns.
• Excessive idle time.
• Poor supervision.
• Inadequate training.
• Labour disputes and interruptions.

Relationship with Other Labour Variances

LCV = LRV+LEV

Where:

• LRV = Labour Rate Variance
• LEV = Labour Efficiency Variance

Illustration

Suppose:

Labour Rate Variance = ₹600 (A)

Labour Efficiency Variance = ₹400 (A)

Then,

LCV = ₹600 + ₹400L

$$=₹1,000(A)$$

Verification Example

Standard

100 hours @ ₹50 = ₹5,000

Actual

110 hours @ ₹55 = ₹6,050

Labour Rate Variance

LRV = 110(50−55)LR

$$=₹550(A)$$

Labour Efficiency Variance

LEV = 50(100−110)

$$=₹500(A)$$

Verification:

LCV=LRV+LEV

 ₹1,050(A) = ₹550(A) + ₹500(A)

Importance of Labour Cost Variance

• Helps control labour costs.
• Measures labour efficiency.
• Evaluates workforce performance.
• Identifies causes of inefficiency.
• Improves manpower planning.
• Assists managerial decision-making.
• Facilitates cost reduction.
• Improves productivity.
• Strengthens budgetary control.
• Enhances profitability.

Advantages of Labour Cost Variance Analysis

• Provides better labour cost control.
• Identifies inefficient work practices.
• Improves employee performance.
• Assists in wage planning.
• Enhances resource utilization.
• Facilitates corrective action.
• Supports managerial planning.
• Improves organizational profitability.

Limitations of Labour Cost Variance

• Depends on accurate standards.
• Requires detailed labour records.
• Time-consuming process.
• Ignores qualitative factors.
• Difficult in rapidly changing environments.
• May create employee resistance.
• Not suitable for all industries.

2. Labour Rate Variance (LRV)

Labour Rate Variance (LRV) is the difference between the standard wage rate and the actual wage rate paid to workers for the actual hours worked. It measures the effect of paying wages at a rate different from the predetermined standard rate.

This variance helps management determine whether labour costs have increased or decreased due to changes in wage rates. It is an important tool for controlling labour expenses and evaluating the efficiency of wage administration.

Definition

Labour Rate Variance is the portion of Labour Cost Variance that arises because the actual wage rate differs from the standard wage rate.

Formula

LRV = AH(SR−AR)

Where:

• AH = Actual Hours Worked
• SR = Standard Rate per Hour
• AR = Actual Rate per Hour

Alternative Formula

LRV = (AH×SR) − (AH×AR)

Interpretation of Labour Rate Variance

Favourable Variance (F)

When:

SR > AR

The actual wage rate is lower than the standard rate.

Adverse or Unfavourable Variance (A)

When:

AR > SR

The actual wage rate is higher than the standard rate.

Example 1

Standard Data

• Standard Rate = ₹50 per hour

Actual Data

• Actual Hours = 100 hours
• Actual Rate = ₹55 per hour

Labour Rate Variance

LRV = 100(50−55)

$$=₹500(A)$$

Thus, the company has an Adverse Labour Rate Variance of ₹500.

Causes of Favourable Labour Rate Variance

• Employment of lower-paid workers.
• Reduction in wage rates.
• Availability of abundant labour.
• Efficient labour scheduling.
• Reduction in overtime payments.
• Better labour negotiations.
• Use of apprentices or trainees.
• Lower incentive payments.

Causes of Adverse Labour Rate Variance

• Payment of overtime premium.
• Increase in wage rates.
• Employment of highly skilled workers.
• Labour shortages in the market.
• Revision of labour agreements.
• Government regulations on wages.
• Payment of bonuses and incentives.
• Unexpected changes in labour policies.

3. Labour Efficiency Variance (LEV)

Labour Efficiency Variance (LEV) is the difference between the standard hours allowed for actual production and the actual hours worked, valued at the standard wage rate.

It measures the efficiency of labour in terms of time taken to complete production. This variance indicates whether workers have taken more or less time than the standard time prescribed for producing a particular output.

Labour Efficiency Variance helps management evaluate worker productivity and identify operational inefficiencies.

Definition

Labour Efficiency Variance is the portion of Labour Cost Variance that arises because the actual time taken differs from the standard time allowed.

Formula

LEV = SR(SH−AH)

Where:

• SR = Standard Rate per Hour
• SH = Standard Hours for Actual Output
• AH = Actual Hours Worked

Alternative Formula

LEV = (SH×SR) − (AH×SR)

Interpretation of Labour Efficiency Variance

Favourable Variance (F)

When:

SH > AH

The actual hours worked are less than the standard hours allowed.

Adverse or Unfavourable Variance (A)

When:

AH > SH

The actual hours worked exceed the standard hours.

Example

Standard Data

• Standard Hours = 100 hours
• Standard Rate = ₹50 per hour

Actual Data

• Actual Hours = 110 hours

Labour Efficiency Variance

LEV = 50(100−110)

= ₹500(A)

Thus, the company has an Adverse Labour Efficiency Variance of ₹500.

Importance of Labour Efficiency Variance

• Measures worker productivity.
• Helps control labour costs.
• Identifies inefficiencies in production.
• Assists in performance evaluation.
• Improves manpower planning.
• Helps reduce production delays.
• Facilitates corrective action.
• Improves operational efficiency.
• Supports managerial decision-making.
• Increases profitability.

Advantages of Labour Efficiency Variance Analysis

• Improves productivity control.
• Identifies inefficient work methods.
• Helps reduce labour costs.
• Improves supervision.
• Assists in training requirements.
• Facilitates performance evaluation.
• Enhances resource utilization.
• Supports cost reduction and profitability.

Limitations of Labour Efficiency Variance

• Depends on accurate standards.
• Ignores qualitative factors.
• May be affected by machine performance.
• Requires detailed records.
• Time-consuming process.
• Difficult in service industries.
• External factors may distort results.

4. Labour Mix Variance (LMV)

Labour Mix Variance (LMV) is the portion of Labour Efficiency Variance that arises because the actual composition or mix of different categories of labour differs from the standard labour mix.

It occurs when an organization employs workers in proportions different from the predetermined standard, such as using more unskilled workers and fewer skilled workers or vice versa. Labour Mix Variance helps management determine whether changes in the labour composition have increased or reduced labour costs and efficiency.

Definition

Labour Mix Variance is the difference between:

The standard cost of the revised standard labour mix and the standard cost of the actual labour mix.

Formula

LMV = ∑SR(RSH−AH)

Where:

• SR = Standard Rate per Hour
• RSH = Revised Standard Hours
• AH = Actual Hours Worked

Calculation of Revised Standard Hours (RSH)

RSH = (Total Actual Hours / Total Standard Hours) × Standard Hours of each grade

Interpretation

Favourable Variance (F)

When the actual labour mix is more economical than the standard mix.

Adverse or Unfavourable Variance (A)

When the actual labour mix is less economical and increases labour cost.

Example

Standard Labour Mix

Actual Labour Mix

Step 1: Calculate Revised Standard Hours

Since total actual hours equal total standard hours, the Revised Standard Hours remain:

• Skilled Workers = 60 hours
• Unskilled Workers = 40 hours

Step 2: Calculate Labour Mix Variance

Skilled Workers

LMV = 20(60−50)

$$=₹200(F)$$

Unskilled Workers

LMV=10(40−50)

$$=₹100(A)$$

Total Labour Mix Variance

LMV = ₹200(F)−₹100(A)

$$=₹100(F)$$

Therefore, the Labour Mix Variance is ₹100 Favourable.

Importance of Labour Mix Variance

• Helps control labour composition.
• Measures efficiency of labour utilization.
• Assists in manpower planning.
• Evaluates labour substitution decisions.
• Improves production efficiency.
• Helps reduce labour costs.
• Supports performance evaluation.
• Assists managerial decision-making.
• Improves resource allocation.
• Enhances profitability.

Advantages of Labour Mix Variance Analysis

• Detects inefficient labour combinations.
• Improves manpower utilization.
• Facilitates labour planning.
• Helps control labour costs.
• Supports production management.
• Assists in corrective actions.
• Improves operational efficiency.
• Increases profitability.

Limitations of Labour Mix Variance

• Requires detailed labour records.
• Depends on accurate standards.
• Time-consuming calculations.
• Ignores qualitative aspects of labour.
• Difficult in service industries.
• External factors may influence labour availability.