Labour Variance or Direct Labour Variance is basically the difference between the standard price or cost of direct labour and actual price or cost of direct labour of production in a certain time-period.
Types of labour variance:
- Labour Rate Variance
This is the difference between the standard price and the actual price used in the “actual” number of hours.
The formula for Labor Rate Variance is:
Direct Labor Rate Variance = (Standard labour rate – Actual labour rate) x Actual labour hours (Provided all rates are direct)
- Labour Efficiency Variance
This is the difference between the hours of standard labour, that should have been worked and the real or actual number of hours worked for the units produced. Here the hours of labour are calculated at the standard rate of labour. This is also said as wage difference.
This Labor Variance is calculated as = Standard labour price – Actual Labour price.
This basic information is the first thing that should be remembered while working on labour variances homework answers.
Now let’s discuss some relevant problems that might be useful for labour variances homework answers.
Example 1: Suppose a t-shirt manufacturing company, in a certain period manufactured, then sold 5,000 t-shirts. The following table summarises all information for direct labour cost and per-unit production time:
|Real or Actual hours/ unit||Standard hours/ Unit||Real or Actual Rate/ Hour||Standard Rate/ Hour|
- The first step is to calculate the Actual / Real Hours. Which is the product of the total units produced x Actual or Real Price/ For this example, it is = 5000 units x 0.4 (Actual or Real Price/ unit) = 2000 hours.
- The second step is to calculate the Actual cost = Actual/ Real hours x Real or Actual Rate/ Hour. For this example, it is = 2000 hours (Actual hours) x $15 (Real or Actual Rate/ Hour) = $30,000.
- The third step is the Standard price or cost of the actual hours = Real or Actual Hours X Standard Rate/ Hour = 2000 (Real or Actual Hours) hours x $13 (Standard Rate/ Hour) = $26,000.
- The Last step is to calculate the Labour Variance = Real / Actual Cost (Step 2) – Standard price or cost of the Actual Hours (Step 3) = $30,000 – $26,000 = $4000. As the Actual cost is higher than the standard, hence this is an adverse variance.
Example 2: Suppose a company ABC is a manufacturing company. The standard rate of wage is $8.5 per hour. 500 hours were worked last month producing 2,000 units. Labours were paid at the rate of $ 9.00 per hour. The direct labour rate variance will be = (500 x $8.5) – (500 x $ 9.00)
= $4,250 – $4,500
= $250 (Adverse Variance)
OR, it might be calculated as = $500 (9.00 – 8.5)
= $500 x $0.5
= $250 (Adverse Variance)
For this example, the company ABC has an adverse labour variance of $250as it has paid a higher hourly rate of $9.00 compared to the than the standard rate of $8.5.
For the completion of labour variances homework answers analysis of adverse/ favourable labour reasons are necessary. In general, and for both these cases, the reasons are listed as follows:
- Reasons for favourable Labour variances:
- More unskilled or semi-skilled workers worked for the duration.
- Supply of more labour in number because of which labour cost went down. Sometimes this can be the result of immigration policy changes.
- The high standard cost of labour, that automatically triggers the cost of the system.
- Reasons for adverse labour variances:
- Increase in the minimum wage rate overall.
- More skilled labours were hired than calculated in the standard and would reflect a favoured labour variance.
- Inefficient hiring
- Better negotiations were done by labour unions.
Possible Reasons for adverse labour variances:
Although Labour variance is not a rare incident but favourable or adverse can happen for various reasons. It is very important to know the reasons, especially for adverse ones when one is attempting labour variances homework answers. The reasons could be as follows:
All jobs do not require highly skilled labours. Some are very complicated and need experienced and skilled workers. Only in those cases, highly skilled labours should be hired. If highly skilled and experienced workers are hired for a simple job, then that willmost definitely lead to adverse labour variance as they would have to be paid higher wage rates.
But if semi or unskilled labours are hired for a complicated job, in that case, favourable labour variance might result as they are generally paid low salaries but the job might not be as efficiently done as the other one. Hence the careful selection of labour is very important to avoid labour variances.
Hence, to fetch better marks for labour variances homework answers, first,you need to clear the basic concepts as discussed earlier in this article. The concepts are not complicated but could be confusing. Then work on some example problems as discussed here, try to find out the solution for them. Find out whether the Labour variance is favourable or adverse.
If it is adverse, then try to analyse the possible scenarios from the given circumstances. If it is favourable, then try to think what could have possibly make it adverse.So that you know how to avoid such situations. After all these steps, attempt your problem.