CAT / FIA FMA Syllabus E. Standard Costing - Labour total, rate and efficiency variances - Notes ^{3 / 8}

The total labour variance can be subdivided between labour rate variance and labour efficiency variance.

direct labour total variance =	actual units should have cost	$x
	actual units did cost	$x
		-------
	direct labour total variance	$x (f/a)
		=====

direct labour rate variance =	actual hrs should have cost	$x
	actual hrs did cost	$x
		-------
	direct labour rate variance	$x (f/a)
		=====

direct labour efficiency variance =	actual units should have taken	x hrs
	actual units did take	x hrs
		---------
	efficiency variance in hrs	x hrs (f/a)
	x standard rate per hr	$x
		---------
	efficiency variance in $	$x (f/a)
		======

Standard cost/hour $5
Actual hours 45,400
Actual amount paid for actual hours $224,515

What is the labour rate variance?

Solution

45,400 should pay 45,400 x $5= $227,000
Did pay $224,515

Labour rate variance is $2,485 Favourable (Paid less than should have)

Actual production 8,900 units
Standard hours/unit 5 hours at $5/hour
Actual hours worked 44,100

What is the labour efficiency variance?

Solution

Should work 8,900 x 5 hours = 44,500 hours
Did work 44,100

Labour efficiency variance is 400 hours x $5/hour = $2,000 Favourable (We paid less than we should have)

Idle time occurs in an organisation when workers are being paid, but they are not working, for example, due to a machine breakdown.

It is always an adverse variance.

How to calculate it?

(Actual hours paid-Actual hours worked) x standard rate per hour

Actual hours paid for 45,400
Actual hours worked 44,100
Standard rate/hour $5

What is the idle time variance?

Solution

(Actual hours paid-Actual hours worked) x standard rate per hour
= (45,400 - 44,100) x 5
= $6,500 Adverse (Idle time is always a bad thing!)