Standard Costing

Labour Variances

Labour Variances

Abbreviations:

• SH = Standard Hours (total for all units produced)
• AH = Actual Hours (total for all units produced)
• SR = Standard Rate per hour
• AR = Actual Rate per hour

SH and AH are total hours for all budgeted units of production — NOT per unit

Formulas

Key notes:

• Total variance = rate variance + efficiency variance
• For rate variance: hours are held constant at AH (isolates the change in rate only)
• For efficiency variance: rate is held constant at SR (isolates the change in hours only)
• Either formula version is acceptable

Worked example

ABC Ltd for August:

Total variance:       (1 400 × 9.50) − (1 350 × 9.60) = 13 300 − 12 960 = £340 F

Rate variance:        (1 350 × 9.50) − (1 350 × 9.60) = 12 825 − 12 960 = £135 A
                      or: 1 350 × (9.50 − 9.60) = 1 350 × 0.10 = £135 A
                      (Adverse: paid £0.10 more per hour)

Efficiency variance:  (1 400 × 9.50) − (1 350 × 9.50) = 13 300 − 12 825 = £475 F
                      or: 9.50 × (1 400 − 1 350) = 9.50 × 50 = £475 F
                      (Favourable: used 50 fewer hours)

Labour reconciliation statement

Check: Total variance = 135A + 475F → net £340F ✓