Direct Labour Variances (Cambridge International A-Level Accounting)
Labour variances
Spec point — how to calculate the following variances: – direct labour rate and efficiency
Labour variances
How to calculate the labour variances?
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The total direct labour variance is the difference between the flexed budgeted cost and the actual cost for direct labour
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It is split into two variances
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Direct labour rate variance
- The variance due to the difference between the budgeted and actual rate of pay
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Direct labour efficiency variance
- The variance due to the difference between the flexed budgeted and actual labour hours needed
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| Total direct labour variance | |
|---|---|
| What is the formula? | (standard hours for actual production × standard rate) - (actual hours used × actual rate) |
| What are the steps? | - Find total budgeted cost for direct labour by multiplying the standard rate per hour with the standard hours expected for the actual output - Find total actual cost for direct labour by multiplying the actual rate per hour with the actual hours used - Find the difference between the two costs |
| When is it favourable? | The total actual labour cost is less than the total standard labour cost |
| Direct labour rate variance | |
| What is the formula? | actual hours used × (standard rate – actual rate) |
| What are the steps? | - Find the difference between the actual rate and the standard rate per hour - Multiply by the actual hours used |
| When is it favourable? | The actual rate is less than the standard rate |
| Possible causes of variances | - Unexpected overtime and bonuses - High or less skilled workers are recruited - Rise in minimum wage |
| Direct labour efficiency variance | |
| What is the formula? | standard rate × (standard hours for actual production – actual hours used) |
| What are the steps? | - Find the difference between the standard hours expected for the actual output and the actual hours used - Multiply by the standard rate per hour |
| When is it favourable? | The actual hours of labour used is less than the standard hours expected for the actual output |
Exam Hint For the total direct labour variance and direct labour efficiency variance, make sure you flex the budgeted data so that it reflects the actual number of units produced.
Also, another name for standard cost is budgeted cost!
What are the possible causes of variances?
- High-skilled workers will be more efficient
- Workers may not be working at full capacity
- Absent staff could lead to more inefficiencies
- Good training will help improve efficiency
Worked Example Brakes Ltd make brake pads. Here is the annual budgeted and actual information:
Budgeted Actual Production (units) 10 000 12 000 Labour rate per hour $12.00 $14.00 Labour hours needed per unit 5 hours 4 hours and 30 minutes Calculate:
(i) direct labour rate variance
(ii) direct labour efficiency variance
(iii) total direct labour variance
Answer:
(i) Direct Labour Rate Variance
Find the actual hours used
12 000 × 4.5 hours = 54 000 hours
Use the formula
- actual hours used × (standard rate – actual rate)
- It is adverse because the actual rate per hour is more than budgeted
54 000 × ($12.00 - $14.00)
Final answer: $108 000 Adverse
(ii) Direct Labour Efficiency Variance
Find the budgeted hours of labour for the actual amount of units produced
- Ignore the budgeted units
- Multiply the actual number of units by the budgeted labour hours per unit
12 000 × 5 hours = 60 000 hours
Use the formula
- standard rate × (standard hours for actual production – actual hours used)
- It is favourable because the actual hours of labour used are less than the standard hours
$12.00 × (60 000 - 54 000)
Final answer: $72 000 Favourable
(iii) Total Direct Labour Variance
Combine the variances
Direct labour rate variance $108 000 ADV Direct labour efficiency variance $72 000 FAV Total direct labour variance $36 000 ADV Alternatively, you can use the formula
- (standard hours for actual production × standard rate) - (actual hours used × actual rate)
(60 000 × $12.00) - (54 000 × $14.00)
Final answer: $36 000 Adverse
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