Page 181 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Labour Effi ciency Variance

The efficiency of the labour is denominated only in actual hours for actual output, which should

be less than the standard hours expected to perform during the job. The labour effi ciency variance
is the deviation in between two standard hours for actual output and actual hours taken for
actual output. The expression of variance in terms of hours should be expressed in terms of wage
rate, i.e. standard wage rate.

Why the expression should be in the standard wage rate?

The aim of expressing Efficiency variance in terms of standard wage is to express them in
monetary units and should be free from the demand and supply forces of the labour force which
directly has an impact on the basic labour wage rate.

Labour Efficiency Variance = Standard Rate (Standard Hours for Actual Output — Actual
Hours for Actual Output)
What are causes of this variance?

1. Due to poor working conditions, the efficiency of the working force to complete the job is

coming down.
2. Quality of maintenance of the machinery is facilitating the working force to maintain the
effi ciency.
3. Frequent change in the quality of materials may lead change in the hours required to
complete the work.
4. Poor personnel relations of the workers.

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 effi ciency variance.
Solution:
Labour Efficiency Variance = Standard Rate (Standard Hours for Actual Output – Actual Hours

for Actual Output)
= (SH – AH) SR
= (20,000 – 20,500) 5 = 2,500 (A)

Idle Time Variance

The wages which are paid for unproductive hours to the labourers are known as idle time.

The idle time may be classified into two categories:
1. Normal idle time
2. Abnormal idle time

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