Labour Variances

We can now look at the calculation of the efficiency and rate variances for labour, using the same basic layour as before.

Labour Cost Variances

Total Variance =

  standard labour cost less actual labour cost

Efficiency Variance =

  (standard hours produced less actual hours worked)
x standard labour rate

Rate variance =

  (standard labour rate less actual labour rate)
x actual hours worked

Example

The standard labour requirement per unit is: 10 direct labour hours at £5 per hour.

During the month, actual direct labour amounted to 1,100 hours at a total cost of £4,950. Actual output was 105 units.

If we slot this into the formulae we can calculate the figures.

Total Variance = £300 +

standard labour cost less actual labour cost
105 units x 10 hours/unit x £5/hr
= £5,250
-
£4,950

Efficiency Variance = £250 -

(standard hours produced  less  actual hours worked) x standard rate
105 units x 10 hrs/unit
= 1,050 hrs
- 1,100
= 50 hrs - x £5

Rate Variance = £550 +

(standard labour rate less actual labour rate) x actual usage
£5/hr - £4,950 ÷ 1,100 hrs
= £4.50/hr
£0.50 +
x 1,100

In this example, both the total and the rate variances are favourable whilst the efficiency variance is adverse.

Now try the following questions on your own. The answers are at the back of the unit.