Page 180 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 9: Variance Analysis

Standard hours for actual production = 20 × 1000 u = 20,000 Notes

Labour Cost Variance = (20,000 × 5) – (20,500 × 4.80)
= 1,00,000 – 98,400 = ` 1,600 (F)
Labour Rate or Wage Pay Variance

This is the variance, resultant, due to the change in the wage rate. The Labour rate variance
is the difference between standard wage rate, which already determined and the actual wage
rate incurred during the production. The variance should be denominated in terms of the actual
hours of production.

Did u know? Why is the expression in terms of the actual hours?
The actual hours taken is into consideration only for reality, that is the time moments
consumed by the production process. This expression facilitates to understand the
excessive/lesser amount spent on the labour, which depicts, how much was over/under

spent by the firm for the payment of wages than the planned during the production.
The causes of labour wage rate or pay variance:
1. It is due to changes occurred in the structure of basic wages.
2. The ratio of the labour mix is varied due to the nature of the order. Undertaken by the
firm to meet the needs of the consumers. The special order from the buyer may require

the goldsmith to take more special care in the design of an ornament than the regular or
routine design. This leads to involvement of more amount of skilled labour, which fi nally
escalates/increases the cost of the labour.
3. To fulfill the immediate and excessive orders of the consumers which are to be supplied to

their requirements leads to greater payment of wages through over time charges; which is
normally greater than the regular wage rate.
4. This variance mainly occurs in the industry, which is connected with seasonal business.
This variance mainly plays pivotal role in the industries of soft drinks, fans, refrigerator,
fertilizer, crackers and so on.
The Labour Rate Variance (LRV) = Actual hours taken (Standard Rate – Actual 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 rate variance.
Solution:
Labour Rate Variance = Actual hours taken (Standard Rate – Actual Rate)
= (SR – AR) AH
= (5 – 4.80) 20,500
= ` 4,100 (F)

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