Page 236 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 11: Variance Analysis

Notes
90 kgs × 6 60 kgs × 8 540 + 480 1020
= = 7.55/-
135 135 135
Material Yield Variance = Standard Price (Actual Yield – Revised Standard Yield)
= 7.55 (130 Units – 135 Units) = 7.55 (–5 Units)
= 37.55 (Adverse)

11.3 Labour Variance

Labour Variance is known in other words as Labour Cost Variance. The cost of the labour is
usually denominated by the wages paid/incurred during the production. Labour Variance
Analysis, is studying the deviation in between the actual cost of the labour incurred and standard/
budgeted cost of the labour. This is another most important cost variance, next to material cost
variance, 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.

11.3.1 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 efficiency 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 specifically 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 11.3

Labour Cost Variance

Labour Rate Variance Labour Efficiency Variance

Labour Mix Labour Idle Time Labour Yield
Variance Variance 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

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