ACCA PM Syllabus D. Budgeting And Control - Labour total, rate and efficiency variance - Notes 2 / 5
The total labour variance can be subdivided between labour rate variance and labour efficiency variance.
| direct labour total variance = | actual units should have cost | $x |
| actual units did cost | $x | |
| ------- | ||
| direct labour total variance | $x (f/a) | |
| ===== | ||
| direct labour rate variance = | actual hrs should have cost | $x |
| actual hrs did cost | $x | |
| ------- | ||
| direct labour rate variance | $x (f/a) | |
| ===== | ||
| direct labour efficiency variance = | actual units should have taken | x hrs |
| actual units did take | x hrs | |
| --------- | ||
| efficiency variance in hrs | x hrs (f/a) | |
| x standard rate per hr | $x | |
| --------- | ||
| efficiency variance in $ | $x (f/a) | |
| ====== |
The direct labour total variance is the difference between what the output should have cost and what it did cost, in terms of labour.
The direct labour rate variance is the difference between the standard cost and the actual cost for the actual number of hours paid for.
In other words, it is the difference between what the labour did cost and what it should have cost.
The direct labour efficiency variance is the difference between the hours that should have been worked for the number of units actually produced, and the actual number of hours worked, valued at the standard rate per hour.
In other words, it is the difference between how many hours should have been worked and how many hours were worked, valued at the standard rate per hour.
| variance | favourable | adverse |
| labour rate | use of apprentices or other workers at a rate of pay lower than standard | wage rate increase use of higher grade labour |
| idle time | the idle time variance is always adverse | machine breakdown non-availability of material illness or injury to worker |
| labour efficiency | output produced more quickly than expected because of work motivation better quality of equipment or materials, or better methods. errors in allocating time to jobs Using more experienced labour | lost time in excess of standard allowed. output lower than standard set because of deliberate restrictions, lack of training or sub-standard material used. errors in allocating time to jobs |
Illustration - Labour rate variance
Standard cost/hour $5
Actual hours 45,400
Actual amount paid for actual hours $224,515
What is the labour rate variance?
Solution
45,400 should pay 45,400 x $5= $227,000
Did pay $224,515
Labour rate variance is $2,485 Favourable (Paid less than should have)
Illustration - Labour efficiency variance
Actual production 8,900 units
Standard hours/unit 5 hours at $5/hour
Actual hours worked 44,100
What is the labour efficiency variance?
Solution
Should work 8,900 x 5 hours = 44,500 hours
Did work 44,100
Labour efficiency variance is 400 hours x $5/hour = $2,000 Favourable (We paid less than we should have)
Illustration - Idle time variance
Actual hours paid for 45,400
Actual hours worked 44,100
Standard rate/hour $5
What is the idle time variance?
Solution
(Actual hours paid-Actual hours worked) x standard rate per hour
= (45,400 - 44,100) x 5
= $6,500 Adverse (Idle time is always a bad thing!)