Page 237 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 11.3.2 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.

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 finally
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)
11.3.3 Labour Efficiency 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 efficiency 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
efficiency.

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