Accounting Assignment Help With Classification of Labour Efficiency Variance

4.7.2.1 Classification of Labour Efficiency Variance

Labour efficiency variance can be further sub-divided into:

1) Labour Idle Time Variance

2) Labour Mix Variance

3) Labour Yield Variance

Let us study these in detail.

Labour Idle Time Variance

Labour Idle time variance is a sub-variance of labour efficiency variance. It is the standard wage payable during the idle hours due to abnormal circumstance like strikes, lockout, break-down or machinery, power cut, shortage or raw materials etc. The abnormal idle time should be separated from the labour efficiency variance as it is due to the reasons beyond the control of workers. Otherwise it will show inefficiency on the part of workers. This variance will always be adverse. It is calculated as follows:

Idle Time Variance = Idle Hours X Standard Rate

ITV = IH X SR

For example, if the idle time in the data given in Illustration 7, is 20 hours, then the idle time variance would be

Idle Time Variance = Idle Hours X Standard Rate

= 20 hours X $5

= $100 (A)

Example

The following information is supplied to you:

Standard time for a month 4000 Hours

Standard wage rate : $2.25 per hour

Number of labourers employed : 30

Average working days in a month : 25

No. of hours a worker works per day: 7 hours

Total wage bill in a month : $ 13125

Idle time due to power failure : 100 hours

You are required to calculate the following:

Labour Cost Variance

Labour Rate Variance

Labour Efficiency Variance

Labour Idle Time Variance

Solution

Standard time = 4000 hours

Standard wage rate = $2.25

Actual time 30 workers X 25 days X 7 hours

= 5250 hours

Total Wage bill

Actual Wage Rate ------------------

Actual time

$ 13125

= ----------- = $ 2.50

5250 h$

a) Labour Cost Variance = Standard Labour Cost – Actual Labour Cost

= (Std. Time X Std. Rate) – (Actual time X Actual Rate)

= (4000 hours X $ 2.25) – (5250 hours X $ 2.50)

= $9000 – $ 13125

= $ 4125 (A)

b) Labour Rate Variance = Actual Time (Std. Labour Rate – Actual Labour Rate)

= 5250 hours ($2.25 – $2.50)

= 5250 X 0.25

= $ 1312.50 (A)

c) Labour Efficiency Variance = Standard Labour Rate (Std. Time – Actual Time)

= $ 2.25 (4000 hours – 5250 hours)

= $2.25 X 1250 hours

= $ 2812.50 (A)

d) Labour Idle Time Variance = Idle Time X Standard Rate

= 100 hours X 2.25

= $ 225 (A)

Verification

Direct Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance

$ 4125 (A) = $1312.50 (A) + $2812.50 (A)

$ 4125 (A) = $4125 (A)

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