Page 129 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 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 7.3: Structure of Labour Cost Variance

Labour Cost Variance

Labour Rate Variance Labour Efficiency Variance

Labour Mix Variance Labour Idle Time Variance Labour Yield 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

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

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