Reasons of Adverse labour rate variance

Reasons of Adverse labour rate variance

Adverse labour rate variance mean actual cost of labour is more than total expected cost. Adverse labour rate variance results due to high actual unit labour cost than unit standard cost, because quantity of labour would be same for both costs (i.e. actual quantity).

1.    High Skilled labour

Adverse labour rate variance may result due to high skilled labour, because high skilled labour would demand high wage, which might be higher than standard cost. The higher actual cost than standard cost would result in adverse labour rate variance.

2.    Raise in labour Demand

Adverse labour rate variance may be caused due to raise in labour demand. High demand of labour would push the labour rate upward, which may be higher than standard labour rate.

3.    Inflation

Adverse labour rate reason may be due to inflation in the market. Inflation (increase in price) would raise the actual rate of labour than standard rate, which would create a situation of adverse labour rate. (Actual cost is more than expected cost).

Reasons of Favorable Labour Rate Variance

Reasons of Favorable Labour Rate Variance

When the actual cost is lower than standard cost, then variance is said to be favorable labour rate variance. Reasons for favorable Hiring of lower quality of labour, lowering the wage rate for the labour, and deflation in the economy.

1.    Unskilled labour

Favorable labour rate variance may be achieved by applying low skilled labour, as the rate of low skilled labour would be lower, which would result in favorable labour variance.

2.    Low Wage Rate

Favorable labour rate variance can be obtained by lowering the wage rate or wage cut. This would again lower the total actual cost against total standard cost.

3.    Deflation in the economy

Economy slow growth rate also lower the wage rate in the economy. This is due to low demand of labour in the economy and more supply of labour.

Favorable Labour Rate Variance Example

Favorable Labour Rate Variance Formula

Favorable Labor rate variance would result, when actual rate is lower than standard rate of labour. This concept can be expressed mathematically as under

Actual Cost < Standard Cost = Favorable Labour rate Variance

Actual Quantity x (Standard Rate-Actual Rate)

Example

Labour Spent on a project of production = 2000

Number of Units produced for project = 600 units

Standard Labour hour expected is = 8 hr

Standard Rate of labour for project = $35

Labour Cost of project = 60,000

Calculate Labour rate Variance

Solution

Actual Cost = 60,000/2000=30

Actual Quantity x (Standard Rate-Actual Rate)

= 2000 x (35-30)

= 2000 x 5

= 10000 (favorable)

Labour Rate Variance Formula

Labour Rate Variance Formula

Labour rate variance is difference between the actual rate of actual labour and standard rate of actual labour. Labour rate variance may be favorable or adverse.  Labour rate variance can be calculated following equation or formula

Actual Quantity x (Actual rate- Standard Rate)

Example

Actual Labour on the production of Product X = 5000

Number of Unit produced of Product X = 1500

Standard Labour per unit of product X = 7 hr

Standard Rate = $6

Actual Labour Cost = 50,000

Calculate Labour rate Variance

Solution

Actual Cost per unit = 50,000/5000=10

Actual Quantity x (Standard Rate-Actual Rate)

= 5000 x (6-10)

= 5000 x -4

= -20000 (unfavorable)

Reasons of Favorable Efficiency Variance

Reasons of Favorable Efficiency Variance

Reasons of favorable efficiency variance are high skilled labour, effective supervision, working environment, employees’ incentives. These reasons have been explained below;

1.    High Skilled & Experienced Labour

Favorable efficiency variance may result in, by using high skilled & experienced labour. Because such labour will take less time to do the job than standard time, and thus favorable efficiency variance would emerge.

2.    Effective Supervision

Favorable efficiency variance may also result due to supervision & mentoring. Effective supervision would reduce the time wastage by the labour.

3.    Improving Working Environment

Favorable efficiency variance may be obtained by improving the working environment. It is obvious that suitable working environment would improve the efficiency of labour i.e. labour would work more efficiently.

4.    Incentive

Favorable efficacy variance may also result by introducing the different incentive scheme for labour. Such schemes would encouraged the labour to work more efficiently, provided that such scheme should be performance based (efficiency based).

Favorable Labour efficiency Variance

Favorable Labour efficiency Variance Example

Favorable Labor efficiency means that actual labor hours are less than expected labour hour and this difference is measured at standard labour hour rate. Mathematically this concept can be expressed as under

Actual Hours < Standard hour = Favorable Labour Variance

 Labour Efficiency Variance = (Standard Hours- Actual Hours) x (Standard Rate)

Example

Number of unit is to be produced of a product = 1000

Labour rate for production (Standard)= $ 9

Standard Labour Hours required for one unit = 5 Hr

Actual hour taken was 4000 Hours

Calculate Labour Efficiency Variance

Solution

Standard Hours = 1000 x 5 = 5000 hours

Labour Efficiency Variance = (Standard hours –Actual Hours) x (Standard Rate)

= (5000-4000) x 9

=1000 hr x $ 9

= 9,000 $ (Favorable)

Unfavorable Labour Efficiency Variance

Unfavorable Labour Efficiency Variance Example

Unfavorable labour efficiency variance means that actual labour hours are more than standard hour and this difference is measured at standard rate.

Actual Hours > Standard hour = Favorable Labour Variance

 Labour Efficiency Variance = (Standard Hours- Actual Hours) x (Standard Rate)

Example

Product A Production Demand= 1200 units

Standard labour hour per unit of A= $ 12

Labour requirement per unit = 6 Hours

Actual Labour hour on production = 8000 Hours

Calculate Labour Efficiency Variance

Solution

Standard Hours = 1200 x 6 = 7200 hours

Labour Efficiency Variance = (Standard hours –Actual Hours) x (Standard Rate)

= (7200-8000) x 12

=-800 x 8

= -6,400 $ (unfavorable)

Labour Efficiency Variance Formula

Labour Efficiency Variance Formula

Labour efficiency variance is calculated to show the labour performance. The difference between standard hour & actual hours is measured at standard rate. Labour efficiency ratio may be favorable or unfavorable. Labour efficiency variance can be calculated by the following formula

Actual > Standard hour = unfavorable Labour Variance

Actual Hours < Standard hour = Favorable Labour Variance

 Labour Efficiency Variance = (Standard Hours- Actual Hours) x (Standard Rate)

Example

 Table to be produced = 600

Standard Labour hour rate per table is= $ 6

Standard Labour hour needed per Table = 4 Hr

Actual hour taken was 1800 Hours

Calculate Labour Efficiency Variance

Solution

Standard Hours = 600 x 4 = 2400 hours

Labour Efficiency Variance = (Standard hours –Actual Hours) x (Standard Rate)

= (2400-1800) x 6

=(600 x6)

= 3600 (Favorable Variance)

Advantages of Labour Efficiency Ratio

Advantages of Labour Efficiency Ratio

Labour efficiency ratio provides useful information about the performance or efficiency of the labour work force. This information can be used by the management for performance appraisal of employees.

1.    Performance Controlling Tool

Labour efficiency ratio can be used as performance controlling tool. This ratio provides vital information about the performance of employees.

2.    Performance appraisal & Rewards

Management can use this ratio for performance appraisal of employees; furthermore, such ratio can also be helpful in deciding the rewards for the employee or particular group of employees.

Example

Labour Hours required per unit = 4 Hours

Total Number of unit produced =600 units

Actual hour taken in production =2500 Hour

Management has policy to announce bonus, if standard performance is achieved, suggest management for bonus in this case.

Solution

Standard hours = 600 unit x 4 hr= 2400 hrs

Labour Efficiency Ratio =   Expected Time.   x 100

                                        Actual Time

2400/2500 x 100

= 96% (Labour efficiency)

The performance is 4% below than standard performance; therefore bonus should not be announced by the management.

Labour Efficiency Ratio Example

Labour Efficiency Ratio Example

Labour efficiency ratio concept can be explained with following example. It is important to remember that labour efficiency ratio is important tool to monitor the labour performance.

Labour Efficiency Ratio =   Expected Time.   x 100

                                        Actual Time

Example

Standard Hour for producing a chair = 3 Hours

Number of Chairs produced =500 Chairs

Actual labour consumed on production = 1200 Hour

Calculate the labour efficiency ratio

Solution

Standard hours = 500 Chairs x 3 hr= 1500 hrs

Labour Efficiency Ratio =   Expected Time.   x 100

                                        Actual Time

1500/1200 x 100

= 125% (Labour efficiency)

Assuming standard performance is100%, this ratio shows that labour performed 25% well than expectation.

Labour Efficiency Ratio Formula

Labour Efficiency Ratio Formula

Labour efficiency ratio is calculated by dividing the expected or standard labour hours with actual time taken by labour. This ratio explains the performance or efficiency of labour work force.

Labour Efficiency Ratio =   Expected Time.   x 100

                                        Actual Time

Example

Labour hour required for per unit production of equipment A = 8 Hours

Total Number of unit produced =400 units

Actual hour taken in production = 4000 Hour

Solution

Standard hours = 400 unit x 8 hr= 3200 hrs

Labour Efficiency Ratio =   Expected Time.   x 100

                                        Actual Time

=3200/4000 x 100

= 80% (Labour efficiency)

Labour efficiency has been 80%, which is 20% below than expectation