Page 179 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes which considers the rate of the wage per hour for the computation of the total standard cost of
labour and actual cost of labour like price of the materials per kg.

Labour Cost Variance
Labour cost variance is the tool studies the deviation in between the total standard cost of the
labour and actual cost of labour. The actual labour cost may vary due to many reasons from the
planned, i.e standard.
Causes for the variance:
1. The hourly rate of the labour may vary due to demand and supply of the labour force.
2. The hourly rate of the labour may vary due to nature of the labour required, i.e. Skilled/
Semi-Skilled/Unskilled. The rate differs from one category to another due to effi ciency of
the labours.
3. The Labour cost variance is in relevance with the time component of the job. The time
required to complete the job may vary due to too many reasons; more specifi cally time
wastage results in the production.
The following is the structure of the labour cost variance, which will illustrate the various
components of the labour variance.

Figure 9.3: Structure of Labour Cost Variance

Labour Cost Variance = Standard Cost of the Labour* – Actual Cost of Labour**
* Standard Cost of the Labour = Standard Hours for Actual Output × Standard Hour Wage Rate
** Actual Cost of the Labour = Actual Hours taken for production × Actual Hour Wage Rate

Example: The standard time and rate for unit component are given below:
Standard hours 20
Standard rate ` 5 per hour

Actual data and related information are as under:
Actual production 1000 units: Actual hours 20,500 hours
Actual rate per hour = ` 4.80
Calculate Labour cost variance.
Solution:

Labour Cost Variance = Standard Cost of the Labour – Actual Cost of Labour
= (SH × SR) – (A.H × AR)

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