Cost Accounting

Direct Labour Variance Analysis

 
Direct Labour Rate Variance

The Direct Labour Rate Variance measures the difference between the actual labour rate paid to the budgeted/standard labour rate.

 

Formula = (Actual Labour Rate - Budgeted/Standard Labour Rate) *  Actual Direct Labour Hours Used

(Note: You do not need to remember this as this is included in your formula sheet)

 

Determining Favourable or Unfavourable Variance

  • Favourable - the actual labour rate is lower than the budgeted/standard labour rate, resulting in a negative answer

  • Unfavourable - the actual rate is higher than the budgeted/standard labour rate, resulting in a positive answer.

 

Possible Reasons for Direct Labour Rate Variances

Favourable:

  • The business employed more junior or younger employees who did not require higher wages

Unfavourable:

  • The business used up many overtime hours

  • Employees were awarded higher wage rises by their union

  • The business used more skilled labour who require higher wages

 

Worked Example

Cool Waters are a bottled water manufacturing company. In their last financial year, they planned to used 200 labour hours at $18 an hour but ended up using 250 hours at $17 an hour.

 

Calculate the Direct Labour Rate Variance.

 

Formula = (Actual Labour Rate - Budgeted/Standard Labour Rate) *  Actual Direct Labour Hours Used

= (17-18)*250

= -$250

The answer is negative, hence it is favourable.

= $250 Favourable

 

Direct Labour Efficiency Variance

The direct labour efficiency variance measures the difference between the actual quantity of direct labour hours used and the budgeted/standard quantity of direct labours hours used.

 

Formula = (Actual quantity of direct labour hours used - Budgeted/Standard quantity of direct labour hours) * Standard Labour Hour Rate

 

Determining Favourable or Unfavourable Variance

  • Favourable - the actual labour hours used is lower than the budgeted/standard labour hours used, resulting in a negative answer

  • Unfavourable - the actual labour hours used is higher than the budgeted/standard labour hours used, resulting in a positive answer.

 

Possible Reasons for Direct Labour Efficiency Variances

Favourable:

  • The business employed more skilled and experience labour who were more productive, hence using less direct labour hours

Unfavourable:

  • The business employed more junior and inexperienced employees who used more labour hours to produce goods and services

  • The business's plant and equipment was unreliable, breaking down and requiring employees to take breaks or working more slowly, reducing the efficiency of the production line.

 

Worked Example

Pens Production People Ltd. produce blue ballpoint pens. The company expects to use 250 hours of direct labour at $25.50 an hour. The company actually used 310 direct labour hours at $23.50 an hour.

 

Calculate the Direct Labour Efficiency Variance.

 

Formula = (Actual quantity of direct labour hours used - Budgeted/Standard quantity of direct labour hours) * Standard Labour Hour Rate

= (310-250) *$25.50

= $1530

The answer is postive, hencei s unfavourable.

= $1530 Unfavourable.

 

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