Lesson-27 Labor Cost Variance Analysis Learning Objectives • • • •
To learn how to calculate labor cost variance To learn how to calculate labor efficiency variance To learn how to calculate labor rate variance To learn how to calculate overhead variance
Terminology 1. SH 2. SR 3. AH 4. AR 5. RSH 6. LCV 7. LRV 8. LEV 9. LMV 10. LITV
= = = = = = = = = =
Standard Hours Standard Rate per hour Actual Hour Actual Rate per hour Revised Standard Hour Labor Cost Variance Labor Rate Variance Labor Efficiency Variance Labor Mix Variance Labor Idle Time Variance
Problem 1 The information regarding composition and weekly wages rates of labor force engaged in a particular job is as follows: Workers
Std. No. of Hours -----------------------------Skilled 75 Semi-skilled 45 Unskilled 60
Std. Rate per hour -----------60 40 30
Actual No. of Hours ---------------70 30 80
Calculate the following: • • •
LCV LRV LEV
Solution 1. Labor Cost Variance (LCV) = Skilled
=
(SH x SR)
–
(AH x AR)
(75 x 60)
–
(70 x 70)
Actual Rate per hour ----------------70 50 20
Semi-skilled
=
Unskilled
=
4500
–
4900
=
400(A)
(45 x 40) 1800 (60 x 30) 1800
– – – –
(30 x 50) 1500 (80 x 20) 1600
= =
300 F
Total LCV 2.
=
200 F -------100 F -------
LRV
=
AH (SR – AR)
Skilled
=
70 (60 – 70)
=
70 x (-10)
=
700(A)
Semi-Skill
=
30 (40 -50)
=
30 x (-10)
=
300(A)
Unskilled
=
80 (30-20)
=
80 x (-10)
=
8000(F) -------200 A ---------
Total LRV 3.
=
=
LEV
=
SR (SH AH)
Skilled
=
60 (75-70)
=
60 x 5
=
300 F
Semi-skilled =
40 (45-30)
=
40 x 15
=
600 F
Unskilled
30 (60-80)
=
30 x (-20)
=
600 A --------300 (F) ---------
=
LEV
=
Verification LCV 100 (F) 100 (F)
= = =
LRV + LEV 200 (A) + 300 (F) 100 (F)
Problem 2 The budgeted labor force for producing 1000 articles is as follows: Particulars ------------30 men @ Rs. 40 per hour For 50 hours
Total Std. Hours -----------------1500
Total Std. Cost ------------------600
20 women @ Rs. 30 per hour For 30 hours
1800
200 ----2300 ------
40 ---820 -----
10 boys @ Rs. 20 per hour For 20 hours
600
The actual data for producing 1000 articles is as follows: 25 men @ 45 per hour for 50 hours
1250
562.50
30 women @ 30 per hour for 30 hours
900
270.00
10 boys @ 30 per hour for 15 hours
150 -----2300 ------
30.00 -------86250 --------
Calculate the following: • • • •
LCV LRV LEV LMV
Solution 1.
LCV
=
SH x SR
–
AH x AR
Men
=
1500 x 40
–
1250 x 45
=
3750 F
Women
=
600 x 30
–
900 x 30
=
9000 A
Boys
=
200 x 20
–
150 x 20
=
1000 F ---------4250 (A) ----------
Total 2.
=
LRV
=
(SR – AR) AH
Men
=
(40 – 45) 1250
=
6250 A
Women
=
(30 – 30) 900
=
Nil
Boys
=
(20-20) 150
=
nil
Total 3.
=
LEV
=
(SH – AH) SR
Men Women Boys
= = =
(1500 – 1250) 40 (600 – 900) 30 (200 –150) 20
= = =
Total 4.
LMV
= =
---------6250 (A) ----------1000 (F) 900 (A) 100 F ---------6250 (A) -----------
(RSH –AH) SR
Note The revised standard proportions are same as standard hour because the actual total hours are equal to the total standard hours. Hence, there is no mix variance. Problem 3 The standard labor hours and the rate for production of an article are as follows: Particulars
Hour
Rate per hour
Total
Skilled
5
15.00
75.00
Unskilled
8
5
40.000
4 ----17 ------
7.50
30.00 -------145.00 ---------
Semi-skilled
The actual data for 1000 units is as follows: Skilled
4500
20.00
90.00
Unskilled
10,000
4.50
45.000
Semi-skilled
4200 -------18.700 ---------
7.50
31.500 -------1,66,500 -----------
Calculate the following: •
LCV
• • •
LRV LEV LMV
Solution 1.
2.
3.
4.
LCV Skilled
= =
(SH x SR) – (AH x AR) 500 x 15 - 4500 x 20 = 75000 – 90000 = 15,000 (A)
Unskilled
=
(8,000 x 5) – (10.000 x 45) = 40,000 – 45.000 = 5000 (A)
Semi-skilled =
(4,000 x 750)
=
31,500 =
1500 (A) -------21,500 --------
LRV
=
(SR – AR) AH
Skilled
=
(15-20) 4500
=
Unskilled
=
(750-750) 4200
=
Semi-skilled
=
(50- 450) 1000
=
LEV
=
(SH – AH) SR
Skilled
=
(5000-5500)
15
=
7500 (A)
Unskilled
=
(8000-8800)
5
=
4000 (A)
Semi-skilled
=
(4000- 4400) 75
=
300 (A) -------22.000 (A) -----------
22,500 (A) Nil 500 (F) -------22.000 (A) -----------
LMV For calculating labor variance mix, one has to calculate revised standard mix because standard labor and total actual labor are different. LMV
=
(RSH – AH) SR
RSH Skilled
=
5000 ------- X 18700 17000
=
5500
Unskilled
=
Semi-skilled
=
8000 ------ X 18700 17000 4000 ------ X 18700 17000
=
8800
=
4400
LMV Skilled
=
(5500– 4500) 15
=
15000 (F)
Unskilled
=
(10.000– 8800) 5
=
6000 (A)
Semi-skilled
=
(4400– 4200) 7.5
=
1500 (G) -----------10500 (F) ------------
Working Notes The calculation of standard hours for actual products is as follows: For 1 unit
=
5 hours
Skilled
=
1000 units x 5 hours
=
5000 hours
Unskilled
=
1000 units x 8 hours
=
8000 hours
Semi-skilled
=
1000 units x 4 hours
=
4000 hours --------------17,000 hours ---------------
Overhead Variance Problem Calculate the following overhead variances: Particulars
Budget
Actual
Output in units
12.000
14.000
No. of working days 20
22
Fixed overheads
36.000
49.000
Variable overheads
24.000
35.000
There was an increase of 5% in capacity. Solution First, calculate the standard fixed overhead rate per unit as follows: Standard fixed overhead rate =
36.000 -------12.000 units 24100 --------12.000
Standard variable overhead rate = 1.
Total overhead cost variance
=
3 per unit
=
2 per unit
=
(Actual output x 9 standard rate) – Actual overhead 14000 x (3+2) 2.
–
(49.000+35…)
70.000 - 84.000 = 14000(A) Variable overheads variance = (Actual output x standard variable overhead rate) – (Actual variance overhead) = 14000 x 2– 35.000 = 28000-35.000 = 7000(A)
3.
Fixed overhead variance (Actual output x standard fixed overhead rate) = Actual overhead 14000 x 3 – 49.000 = 42.00 = 7000(A)
4.
Expenditure variance =
5.
6.
Volume variance
Capacity variance
(Budget fixed overhead) – (Actual fixed overhead)
=
36.000 – 49.000 = 13000(A)
=
Actual output x standard rate–budgeted fixed overhead rate
=
(14000 x 3) – (36.000)
=
42.000 – 36.000
=
Standard rate (revised budget units – budget units)
=
Budgeted units for 20 days = 12.000 Budgeted units for 22 days = 12.000 x 22 --------------- = 20
13.200
6.000(F)
Revised budget units =
7.
=
13.200 + (13,200 + 5) (After an increase of 5% capacity) ------------------------------------------------100 13.200 + 660 = 13.860
Capacity variance
=
3(13860 – 13200)
Calendar variance
=
Change in number of units by change in actual and standard number of days x standard rate
=
1980 (F)
Change in number of days = 2 Increase in units in 2 days = 12.000 x 2 -----------20 Calendar variance = 1200 x 3 8.
Efficiency variance
= = = =
= 1200 =
3600 (F)
Standard rate (actual quantity – revised budgeted units) 3 (14.000 – 13.860) 3 (140) 420 (F)
Exercise 1. The standard cost of a chemical mixture is as follows: • • •
8 tons of material A at Rs.40 per ton 12 tons of material B at Rs. 60 per ton Standard yield is 90% of input
The actual cost for a period is as follows: • • •
10 tons of material A at Rs. 30 per ton 20 tons of material B at Rs. 68 per ton Actual yield is 26.5 tons
Compute the variances of all materials. 2. The standard material cost of 100 kgs of chemical D is as follows: • • •
Chemical a A-- 30 kgs @ Rs. 4 per kg Chemical a B-- 40 kgs @ Rs. 5 per kg Chemical a C-- 80 kgs @ Rs. 6 per kg
In a batch, 500 kgs of chemical D was produced from a mix of the following:
• • •
Chemical a A-- 140 kgs at a cost of Rs. 588 Chemical a B-- 220 kgs at a cost of Rs. 1,056 Chemical a C-- 440 kgs at a cost of Rs. 2,860
Calculate all variances. 3. AB Ltd. has established the following standard mix for producing nine gallons of product A: Rs. 5 gallons of material X at Rs. 7 per gallon = 35 3 gallons of material Y at Rs. 5 per gallon = 15 2 gallons of material Z at Rs. 2 per gallon = 4 ------54 A standard loss of 10% of input is expected to occur. The actual input was as follows: • • • •
53,000 gallons of material X at Rs. 7 per gallon 28,000 gallons of material Y at Rs. 5.30 per gallon 19,000 gallons of material Z at Rs. 2.20 per gallon The actual output for a period was 92,700 gallons of product A
Compute all material variances. 4. A gang of workers usually consists of 10 men, 5 women and 5 boys in a factory. They are paid at standard hourly rates of Rs. 1.25, Re. 0.80 and Re. 0.70 respectively. In a normal working week of 40 hours, the gang is expected to produce 1,000 units of output. In a certain week, the gang consisted of 13 men, 4 women and 3 boys. The actual wages were paid at the rates of Rs.1.20, 0.85 and Re. 0.65 respectively. Two hours per week were lost due to abnormal idle time and 960 units of output were produced. Calculate the various labor variances. 5. A factory operates a system of standard costs for a given four-week period budgeted for production of 2,000 units. The actual production was 1,800 units. The costs relating to that period were as follows:
Fixed overheads Variable overhead Semi-variable overheads
Standard (Rs.) 80,000 40,000 15,000
Actual (Rs.) 74,000 38,000 14,700
Semi-variable overheads are 60% fixed and 40% variable. Prepare a variance statement to be presented before the management.