Labour Variances 4 / 9

Labour Variances

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

ACCA MA D2c Total Materials Variance graph
direct labour total variance =actual units should have cost$x
actual units did cost$x
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direct labour total variance$x (f/a)
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direct labour rate variance =actual hrs should have cost$x
actual hrs did cost$x
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direct labour rate variance$x (f/a)
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direct labour efficiency variance =actual units should have takenx hrs
actual units did takex hrs
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efficiency variance in hrsx hrs (f/a)
x standard rate per hr$x
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efficiency variance in $$x (f/a)
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Illustration - Labour rate variance

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)

Illustration - Labour efficiency variance

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)

Therefore, we can see that our total labour variance is:

Labour rate variance is $2,485 Favourable +
Labour efficiency variance is 400 hours x $5/hour = $2,000 Favourable

= $4,485 Favourable for the total labour variance.

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