Unit 12: Variance Analysis – I

After the standard costs have been set, the next step is to ascertain the actual cost of each
element and compare them with the standard already set. The difference of actual from
the standard is Variance. While setting standard specific method of production is to be
kept in mind. If a different method of production is adopted, it gives rise to a different
amount of cost, thereby causing variance, known as method variance. In standard
costing, Variance means the difference between a standard cost and the comparable
actual cost incurred during a period. Variance analysis is the process of analysing
variances by sub-dividing the total variance in such a way that management can assign
responsibility for any off-standard performance. Thus, variance analysis means the
measurement of the deviation of actual performance from the desired performance.

Variance may be favourable or unfavourable depending upon whether the actual cost is
less or more than the standard cost. If the actual cost is less than the standard cost, the
variance is termed as ‘favourable’ and if the actual cost is more than the standard cost,
variance is called as ‘unfavourable’ or ‘adverse’ variance. The effect of favourable
variance increases the profit and it is a sign of efficiency of the organisation. On the
other hand, unfavourable variance refers to the loss of the business and it is a sign of
inefficiency of the organisation.

Controllable and Uncontrolled Variances

The variance may be classified as Controllable and Uncontrollable. Variance is said to

be controllable if it is identified as the primary responsibility of a particular person or
department. The excessive use of materials or labour hours than the standards can be
attributable to a particular person. When the variations are due to the factors beyond the
control of the concerned person or department, it is said to be uncontrolled. The rise in
prices of materials, increase in wage rates, Govt. restrictions etc., are the examples of
uncontrollable variance. These factors are not within the control of the management and
the responsibility of the variance cannot be assigned to any particular person or division.

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The division of variance into controllable and uncontrollable is important from the view
point of management as it can place more emphasis on controllable variance and thus
facilitates to the principle of management by exception. Standard costing to be more
realistic, sometimes the standards set are to be revised on account of changes in
uncontrollable factors like wages, materials etc. To take into account these factors into
variance, a ‘revised variance’ is created and the basic standard is allowed to continue.
This revision variance is the difference between the standard cost originally set and the
revised standard cost.

Finding variance is not the ultimate objective of the standard costing. But their analysis
and finding the causes of variance is the ultimate aim to control cost. Control of cost
depends on the corrective action taken by the management. The analysis of variance
helps the management to locate deficiency and assign responsibility to particular person
or cost centre. The next step of the management is to find out the reason for the variance
to pin points where necessary, corrective action should be taken over.

Classification of Variances

Variances may be classified into two categories viz., cost variances and sales variances.
The cost variance may again be sub-divided into variances for each element of cost as
shown in the following chart:

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-3-
 Variances

Cost Variances Sales Variances

Direct Material Direct Labour Overhead Sales Price Variance Sales Volume Variance
Cost Variance Cost Variance Cost Variance

Price Usage Price Efficiency Variable Fixed

Variance Variance Variance overhead Variance overhead Variance

Mix Variance Yield Variance Mix Yield Idle

Variance Variance Variance

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-5-
The sales variances may again be sub-divided into sales price variance and sale volume
variance. Sub-division of variance of each element of cost gives valuable information to
the management in order to control the cost. In this unit you will study Direct Material
Cost Variance and Direct Labour Cost Variance only. The remaining cost variances you
will study in Unit 12: Variances Analysis – II.

Another classification of Variance analysis is

1. Price Variance and
2. Volume Variance

Price Variance relates to the prices of materials, rates of labour, expenditure on overheads
or selling prices of products. The price variance may be classified as:
a. Material Price Variance
b. Labour Rate Variance
c. Variable Overhead Expenditure Variance
d. Fixed Overhead Expenditure Variance
e. Sales Price Variance

Volume Variance relates to the quantity of units in terms of raw material consumed,
number of hours worked, number of products sold. The volume variance may be divided
as follows:
a. Material Usage Variance
b. Labour Efficiency Variance
c. Fixed Overhead Volume Variance
d. Sales Volume Variance

The total of Price Variance and Volume Variance is known as the Cost Variance.

Direct Material Variances

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Materials constitute most important element of cost. Therefore, utmost care should be
taken in purchasing and using the materials. When deviations occur between the
standards specified and the actuals the following variances could be calculated:
a. Direct Material Cost Variance,
b. Direct Material Price Variance, and
c. Direct Material Usage or Quantity Variance

Let us study the above variances in detail.

a. Direct Material Cost Variance: It is the difference between the standard cost
of materials specified for the output achieved, and the actual cost of direct materials
consumed. The standard cost of materials is computed by multiplying the standard price
with the standard quantity for actual output. The actual cost is computed by multiplying
actual price with the actual quantity used. The Direct Material Variance may be
calculated with help of the following formula:

Direct Material Cost Variance = Standard Cost – for actual output Actual Cost
(DMCV)

Where,
Standard Cost = Standard Price per unit X Standard Quantity used for actual output

Actual Cost = Actual Price X Actual Quantity used.

Direct material cost variance arises due to change in price of materials or change in the
quantity of material used or both. If the standard cost is more than the actual cost, the
variance will be favourable and on the other hand, if the actual cost is more than the
standard cost the variance will be unfavourable or adverse. Let us take an example:

Illustration 1
Calculate Direct Material Cost Variance with the help of the following information:

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Standard Output : 1600 Units
Actual Output : 2000 Units
Standard Quantity required per unit : 2 Kg.
Total Quantity actually consumed : 2400 Kg.
Standard rate per unit : Rs. 8 per Kg.
Actual rate per unit : Rs. 10 per Kg.

Solution
Direct Material Cost Variance = Standard Cost – Actual Cost
or
Standard Actual
price X standard – price X Actual
quantity for Quantity Used
actual output

= Rs. 8 X 2 kg X 2000 kg - Rs. 10 X 2400kg

= Rs. 32000 - Rs. 24000
= Rs. 8000 (Favourable)

b. Direct Material Price Variance: Direct Material Price Variance is the

difference between actual price and standard price of materials consumed. Material price
variance may arise due to the following reasons:
i) Changes in the prices of materials,
ii) Uneconomical size of purchase orders,
iii) Failure to purchase materials at proper time,
iv) Fluctuations in the cost of transportation and carriage of goods,
v) Buying efficiency or inefficiency
vi) Not availing cash discounts when setting standards,
vii) Purchase of substitute material for non-availability of specified material
viii) Changes in the duty structure which is forming part of price,
ix) Inefficiency of purchase department etc.

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Some of the above factors are controllable if proper care is exercised by the management.
Generally, the Purchase Manager will be held responsible for material price variance.
Material price variance will be calculated as follows:

Direct Material Price Variance = Actual Quantity (Standard Price – Actual Price)
= AQ (SP – AP)

If the standard price is more than the actual price, the variance would be favourable and
in case the actual price is more than the standard price, it shows adverse variance.
Adverse material price variance shows that unfavourable prices were paid for materials
consumed and the Purchase Manager would be asked to explain the position.

Illustration 2
Calculate the material price variance with the figures given in illustration 1.

Solution
Direct Material Price Variance = Actual Quantity (Standard Price – Actual Price)
= 2400 (Rs.8– Rs.10)
= 2400 X Rs.-2
= Rs. 4800 (Adverse)

As the actual price is more than the standard price, it shows unfavourable variance.

c. Material Usage (Quantity) Variance: Material Usage Variance is that

portion of material cost which arises due to the difference between the standard quantity
specified and the actual quantity used. In other words, it is the difference between
standard quantity for actual output and actual quantity, multiplied by standard price of
material. The formula for material usage variance is as follows:
Material Usage Variance =
Standard Price (Standard Quantity for actual output – Actual Quantity)
MUV = SP (SQ - AQ)

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This Variance will be considered favourable when standard quantity is more than actual
quanity and vice versa. The production Manager will be held responsible for material
usage variance. Material usage variance will arise due to the following reasons:
i) Use of sub-standard or defective materials,
ii) Carelessness in the use of materials,
iii) Use of substitute materials,
iv) Inefficient production methods,
v) Change in designs than those specified,
vi) Pilferage of material,
vii) Use of non-standard mix,
vii) Use of defective plant,
ix) In correct processing of materials resulting in wastages,
x) Improper inspection and supervision of work men,
xi) Incorrect setting of standards etc.

Direct Material Cost Variance is equal to the sum of Direct Material Price Variance and
Material Usage Variance. Thus,
Direct Material Cost Variance = Material Price Variance + Material Usage Variance

Illustration 3

Gemini Chemical Industries provides the following information from their records:-

For making 10 kgs. Of GEMCO, the standard material requirement is

Material Quantity Rate per kg.

A 8 units Rs. 6.00
B 4 units Rs. 4.00

During April, 2004, 1000 kgs of GEMCO were produced. The actual consumption of
material is as under:

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Material Quantity Rate per kg.
A 750 units Rs. 7.00
B 500 units Rs. 5.00

Calculate:
a) Material Cost Variance
b) Material Price Variance
c) Material Usage Variance

Solution:
a) Material Cost Variance = Standard Cost – Actual Cost
= Rs. 6400 – Rs. 7750
= Rs. 1350 (A)

b) Material Price Variance

= (Standard Price – Actual Price) X Actual Quantity
x Material = (Rs. 6 – Rs. 7) 750 = (Rs. 4- Rs. 5) X 500
= Rs. (-1) 750 = Rs.750 (A)
= Rs. 1250 (A)
y Material = (Rs. 4 – Rs. 5) X 500
= Rs. 500 (A)
x + y Material = Rs. 750 (A) + Rs. 500 (A) = Rs. 1250 (A)

c) Material Usage Variance

= (Standard Quantity for actual output – Actual Quantity) X Standard Price
= x Material + y Material
= (800 kg. – 750 kg) Rs. 6 + (400 kg – 500 kg) Rs. 4
= Rs. 300 (F) = Rs. 400 (A)
= Rs. 100 (A)

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Verification
Material Cost Variance = Material Price Variance + Material Usage Variance
Rs. 1350 (A) = Rs. 1250 (A) + Rs. 100 (A)
Working:
Standard Cost Actual Cost
Material
Quantity Rate Amount Quantity Rate Amount
(kg) (Rs.) (Rs.) (kg) (Rs.) (Rs.)
A 800(1000 6 4800 750 7 5250
kg X 8/10)
B 400(1000 4 1600 500 5 2500
kg X 4/10)
6400 7750

Classification of Material Usage Variance: When more than one type of material
is used in producing a product, the total usage variance will be classified into (a) Material
mix Variance and (b) Material Yield Variance. Let us study these two variances in detail:

a) Material Mix Variance: Material Mix Variance may be defined as that

portion of the material usage variance which is due to the difference between the standard
and actual composition of material mixture. It means that the cause of variance is due to
a change in the ratio of actual material mix from the standard material mix. The variance
results from a variation in the materials mix used in production. Material mix variance
may arise in those industries where a number of raw materials are mixed in order to
produce a final product. Examples are chemical industries, rubber industries etc.

Material Mix Variance is calculated as follows:

Material Mix Variance

= (Revised Standard Quantity – Actual Quantity) X Standard Price
or
RSQ = Total AQ X Standard Ratio

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where,
Standard Quantity for each material Total of actual
Revised Standard Quantity = -------------------------------------------- X Quantities of all
Total Standard Quantity for all material material

If the actual quantity is more than revised standard quantity, an adverse variance will
occur and vice versa.

Material mix variance may arise due to the following reasons:

i) Price actually paid for materials differs from standard prices
ii) Delay in supply of raw materials
iii) Non-availability of one or more components of the mix
iv) Non-purchase of materials at proper time
v) Inefficiency in production department to use proper mix
vi) Actual mix may be different from standard mix, etc.

Illustration 4

A product made from raw materials X and Y has the following Standard Mix:

Material Quantity (Kg.) Price (Rs.) Amount (Rs.)

A 2 2.00 4.00
B 8 1.00 8.00
10 12.00

The actual mix is as follows

Material Quantity (Kg.) Price (Rs.) Amount (Rs.)

A 8 2.00 16.00
B 4 1.25 5.00
12 21.00

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Compute Material Mix Variance.

Solution:
Material Mix Variance
= (Revised Standard Quantity – Actual Quantity) X Standard Price

where, Revised Standard Mix =

RSQ
Total Actual Quantity
----------------------------- X Standard Quantity of each material
Total Standard Quantity
12
Material A = ------- X 2 = 2.4 Kg.
10

Total Actual Quantity

Material B = ----------------------------- X Standard Quantity of B
Total Standard Quantity

12
= ------- X 8 = 9.6 Kg.
10

Alternate method for calculating RSQ :

A and B Material Standard Ration = 2 : 8 or ! : 4
A : Total AQ = 12 kg X ¼ = 2.4 kg
B : Total AQ = 12 kg X 4/5 = 9.6 kg
Computation of Material Mix Variance
A: (Revised Standard Mix – Actual Mix) X Standard Price of A
= (2.4kg. – 8kg.) X Rs. 2
= 5.6kg. X Rs.2 = Rs. 11.2 (A)

B: (Revised Standard Mix – Actual Mix) X Standard Price of B

= (9.60kg. – 4kg.) X Rs. 1.00
= 5.60kg. X Rs. 1.00 = Rs. 5.60 (F)

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Total Material Mix Variance = Rs. 11.2 (A) + Rs. 5.60(F) = Rs. 5.60 (A)

Illustration 5

The following figures relates to the quantity of material required for the production of a
product:

Standard Actual
Quantity Price Amount Quantity Price Amount
(Kgs) (Rs.) (Rs.) (Kgs) (Rs.) (Rs.)
A 60 10 600 80 12 960
B 90 20 1800 60 25 1500
150 2400 140 2460

Compute

a) Material Cost Variance

b) Material Price Variance
c) Material Usage Variance
d) Material Mix Variance

Solution :

a) Material Cost Variance = Standard Cost – Actual Cost

= Rs.2400–2460 = Rs. 60 (A)

b) Material Price Variance = (Standard Price –Actual Price) X Actual Quantity

A : (Rs.10–Rs.12) 80 = Rs.160 (A)
B : (Rs.20–Rs.25) 60 = Rs.300 (A)
------------

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 Rs. 460(A)
-------------

c) Material Usage Variance = Standard Price (Std. Quantity – Actual Quantity)

Material A: (60–80) Rs.10 = Rs.200 (A)
Material B: (90–60) Rs.20 = Rs.600 (F)
-------------
Rs. 400 (F)
--------------

d) Material Mix Variance:

(Revised Standard Quantity – Actual Quantity) X Standard Price
Material A: (56–80) X Rs. 10 = Rs. 240 (A)
Material B: (84–60) X Rs. 20 = Rs. 480 (F)
-------------
Rs. 240 (F)
--------------

Revised Standard Quantity of

Total Actual Quantity
Material A = ----------------------------- X Standard Quantity of A
Total Standard Quantity

140
= ------- X 60 = 56 Kg.
150

Total Actual Quantity

Material B = ----------------------------- X Standard Quantity of B
Total Standard Quantity

140
= ------- X 90 = 84 Kg.
150

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b) Material Yield Variance (MYV) : Material Yield Variance is calculated on the
basis of output while the other variance are calculated on the basis of input. The variance
is calculated as the difference between the standard output and the actual output. If the
actual output is more than the standard output, then the variance would be favourable and
vice versa. The formula for material yield variance is as follows:

Material Yield Variance = (Actual Yield – Standard Yield) Standard output price

Where, standard output price is the total standard material cost per unit of output,

Actual Usage of Material

Standard Yield = ----------------------------------------------
Standard Usage per unit of Output

This variance arises in the case of process industries where loss of material is inevitable
in the process of production of final product. Therefore, in these industries normal loss is
to be taken into account while setting standards. But the actual loss may be different
from the normal loss during the process of actual production. This gives rise to the
variance in the standard yield. The material yield variance may be caused due to the
following reasons:

i) Defective method of operation

ii) Purchase of substandard quantity of material
iii) Lack of proper care in handling
iv) Lack of proper supervision etc.

It should be noted that where several types of materials are used Material Revised Usage
Variance (MRUV) and Material Yield Variance (MYV) imply the same thing, though
both are computed using different formulae. Numerical results would give the same
figure.

Illustration 6

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XY Company Ltd. a manufacturer of product P, uses standard cost system gives you the
following details for 1000 kgs of product P

Ingredients Quantity Kg Price per Kg (Rs.) Cost (Rs.)

A 800 2.50 2000
B 200 4.00 800
C 200 1.00 200
Input 1200
Output 1000

Actual Records Indicate Consumption in January

A 1,57,000 @ Rs. 2.40
B 38,000 @ Rs. 4.20
C 36,000 kgs @ Rs. 1.10

Actual finished production for the month of January is 2,00,000 kgs.

Calculate:
1) Material Cost Variance
2) Material Price Variance
3) Material Mix Variance
4) Material Yield Variance
5) Material Usage Variance

Solution

1. Material Cost Variance = Std. Cost – Actual Cost

A : (16000 kgs X Rs.2.50) – (157000 kgs X Rs.2.40)
= Rs. 400000 – Rs. 376800 = Rs.23200 (F)

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 B : (40000 kgs X Rs.4) – (38000 kgs X Rs.4.20)
= Rs. 160000 – Rs. 159600 = Rs.400 (F)

C : (40000 kgs X Rs.1) – (36000 kgs X Rs.1.10)

= Rs. 40,000 – Rs. 39600 = Rs.400 (F)

M.C.V. = Rs. 24000(F)

2. Material Price Variance = (Standard Price – Actual Price ) X Actual Quantity
Material A = (Rs. 2.50 – Rs. 2.40) X 1,57,000 = Rs. 15,700 (F)
Material B = (Rs. 4.00 – Rs. 4.20) X 38,000 = Rs. 7600 (A)
Material C = (Rs. 1.00 – Rs. 1.10) X 36,000 = Rs. 3600 (A)
--------------------
Total Material Price Variance Rs. 4500 (F)
--------------------
3. Material Mix Variance: (Revised Standard Mix – Actual Mix) Standard Price

where,
Standard Material
Revised Standard Mix = ---------------------------- X Total Actual Material
Total Standard Materials

800 4
A = ------- X 231000 = 1,54,000 Kg. (or) 23100 kg X -------- = 15400 kg
1200 6

200 1
B = ------- X 231000 = 38,500 Kg. (or) 23100 kg X ------- = 38500 kgs.
1200 6

200 1
C = ------- X 231000 = 38,500 Kg. (or) 23100 kg X ------ = 23500 kgs
1200 6

Material Mix Variance:

Material A = (1,54,000-1,57,000) X Rs.2.50 = Rs.7500 (A)
Material B = (38,500-38,000) X Rs.4.00 = Rs.2000 (F)

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 Material C = (38,500-36,000) X Rs.1.00 = Rs.2500 (F)
---------------
Rs.3000 (A)
----------------

4. Material Yield Variance = (Standard Yield – Actual Yield) Std. output Price

Where,
Actual Usage of Material
Standard Yield = ----------------------------------------------
Standard Usage per unit of Output

231000 kgs 231000 kgs

= ----------------------- = ----------------
1.2kg (1200÷1000) 1.2 kg (i.e., 1200 kg ÷ 1000 kgs)

= 192500 Kg.
(Std. material cost per unit of output = Rs. 3000÷1000 output)
Material Yield Variance = (Actual Yield – Standard Yield) Standard output price
= (200000 – 192500) X Rs. 3
= Rs. 22500 (F)

5. Material Usage Variance – (Standard Quantity – Actual Quantity) Standard Price

Material A = (1,54,000 – 1,57,000) X 2.50 = 7500 (F)
Material B = (4,00,000 – 38,000) X 4.00 = 8000 (F)
Material C = (4,00,000 – 36,000) X 1.00 = 4000 (F)
-----------
19500 (F)
-----------

The following formulae may be used for verification of material cost variance:

1. Material Cost Variance = Material Price Variance + Material Usage Variance

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 (MCV) (MPV + MUV)
Rs. 24000 (F) = Rs. 4500 (F) + Rs.19500 (F)

2. Material Usage Variance = Material Mix Variance + Material Yield Variance

(MUV) (MMV + MYV)
Rs. 19500 (F) = Rs.3000 (A) + Rs.22500 (F)

3. Material Cost Variance = Material Price Variance + Material Mix Variance +

Material Yield Variance
(MCV) (MPV + MMV + MYV)
Rs.24000 (F) = Rs.4500 (F) + Rs.3000(A) + Rs.22500 (F)

Check your Progress

1. The production of a certain unit is assumed to require 800 kgs of material costing
Rs. 15. On completion of production of the unit, it was found 750 kg of material
costing Rs. 17.50 per kg was consumed. Calculate the variance
(MCV = Rs. 1125 (A), MPV = Rs. 1875 (A), MUV = Rs. 750 (F))

Variance I
1. The Variance caused due to a different method of production than those specified,
is called method variance. (True)
2. Revision variance is the difference between the original standard cost and the
revised standard cost. (True)
3. Revision variance is created when there are changes in controllable factors.
(False)

Variance II
A Product requires 100 kg. of material at the rate of Rs. 5 per kg. The actual
consumption of material used for producing a product came to 120 kgs @ Rs. 4.75 per
kg. Calculate Direct Material Cost Variance. (Ans Rs. 30 (F))

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From the following information calculate material mix variance
Materials Standard Standard price Actual quantity Actual price
quantity
X 20 units Rs. 10 25 units Rs. 12
Y 30 units Rs. 5 25 units Rs. 8

Ans: Material X = 50 (Adverse), Material Y = 25 (F), Material Mix Variance = Rs. 25

Adverse)

Direct Labour Variances

The labour directly engaged in the production of a product is known as direct labour.
The wages paid to such labour is known as direct wages. For example, the wages paid to
a machine operator is a direct labour cost. Labour variances arise when actual labour
costs are different from standard labour cost. The setting up of standard direct labour
cost will depend upon the following factors:

a) Methods of Production: Standardized methods of production will be decided

by studying motion study.

b) Labour time standards: The time taken by different categories of workers is

known as Labour time standard it will be ascertained by using past record performance,
time and motion study.

c) Labour rate standards: It refers to the expected wage rate to be paid to different
categories of workers. While deciding standard labour rate past wage rates, demand and
supply of labour, anticipated changes in wage rates etc. should be taken into account.
The methods of wage payment like time rates or piece rates and incentive plans are also
to be considered while fixing standard labour rate.

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d) Different grade of labour mix: Standard proportion of different grades of
labour mix is another important factor in setting standard labour cost.

Direct labour variance is the difference between the standard direct labour cost specified
for the activity achieved and the actual direct labour cost incurred. It is calculated as
follows:

Direct Labour Cost Variance = Standard Labour Cost – Actual Labour Cost
or
= (Std. hours X Std. Rate) – (Actual hours X Actual rate)
= (SH X SR) – (AH X AR)

Note: When the actual output differs from standard output, standard labour cost of actual
output is to be worked out and then the following formula is to be applied:

DLCV = Std. cost of actual production – Actual cost

Let us see the following illustration how Direct Labour Cost Variance is calculated:
Illustration 7

From the following information, calculate direct labour cost variance:

Standard wage rate per hour : Rs. 5
Standard time set : 1000 hours
Actual wage rate per hour : Rs. 6
Actual time taken : 980 hours.

Solution
Direct Labour Cost Variance = (SH X SR) – (AH X AR)
= (1000 X Rs.5) – (980 X Rs.6)
= Rs.5000 – Rs.5880

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 = Rs.880 (A)

Direct Labour Cost Variance is sub-divided into:

1. Labour Rate Variance
2. Labour Efficiency Variance

Labour Efficiency or Time Variance may again sub-divided into:

a. Labour Idle Time Variance
b. Labour Mix Variance and Labour Yield Variance

The above classification may also be shown diagramatically as follows:

Labour Cost Variance

Labour Rate Variance Labour Time Variance

Or
(Labour Efficiency Variance)

Labour Idle Time Labour Mix Labour Yield

Variance Variance Variance

Labour Rate Variance

Labour rate variance is that portion of the usage variance which is due to the difference
between standard rate specified and actual rate paid. It is calculated with the help of the
following formula:
Labour Rate Variance = (Standard Rate – Actual Rate) X Actual Hours Paid
LRV = (SR – AR) X AHP

The variance will be favourable if actual rate is less than the standard rate and it will be
adverse if actual rate is more than the standard rate. The responsibility for labour rate
variance lies with the production centre. Labour rate variance is generally uncontrollable.

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If the variance is due to wrong grade of labour, the responsibility lies on production
foreman. Labour rate variance arises due to the following reasons:
i) Change in the basic wage rate of piece-work rate
ii) Employment of one or more workers of different grades than the standard
grade
iii) Payment of more overtime than fixed earlier
iv) Higher or lower wage rates paid to casual labourers
v) Faculty recruitment and placement of workers
vi) New workers not being paid at full wage rates etc.

Illustration 8

Using the data given in illustration, calculate Labour Rate Variance.

Solution

Labour Rate Variance = (Standard Rate – Actual Rate) X Actual Hours Paid
= (Rs.5 – Rs.6) X 980 Hours
= -Rs.1 X 980 hours
= Rs. 980 (Adverse)

Labour Time Variance or Labour Efficiency Variance

Labour efficiency ratio is the difference between the standard labour hours specified for
actual output and the actual hours paid for. This variance helps in controlling efficiency
of workers and also labour cost. This variance can be calculated as follows:

Labour Efficiency Variance

= (Standard hours for actual production – Actual hours worked) X Standard Rate

(LEV) = (SHAP – AHW) X SR

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If actual time taken for doing a work is more than the specified standard time, the
variance will be unfavourable and vice versa. Labour efficiency ratio arises due to one or
more of the following reasons:
i) Defective machinery and equipment
ii) Lack of proper supervision
iii) Use of defective or non-standard materials
iv) Lack of proper training to workers
v) Poor working conditions
vi) Labour turnover or change over of workers from one operation to another.
vii) Alterations in the methods of production
viii) Loss of time due to delay in receipt of instructions or receipt of raw material
or tools.
ix) Failure of power
x) Bad industrial relations etc.

Using the data given in Illustration 7, Labour Efficiency Variance is calculated as

follows:

Labour Efficiency Variance

= (Standard hours for actual output – Actual hours) X Standard Rate
= (1000 hours – 980 hours) X Rs.5
= 20 hours X Rs.5
= Rs.100 (Favourable)

It is to be observed that the work has been completed in 980 hours as against 1000
standard hours set for the production. This may be due to the efficiency of workers. That
is why, this variance is called Labour Efficiency Variance. It is to be noted that the
labour rate variance and labour efficiency variance is equal to labour cost variance.

Verification

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Direct Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance
Labour Rate Variance = Rs.980 (Adverse) as calculated in Illustration 8

Hence, DLCV = LRV + LEV

Rs.880(A) = Rs.980(A) + Rs.100(F)

Labour efficiency variance is the responsibility of Production Manager and is similar to

materials usage variance. Both these variance measure the difference in performance.

Labour efficiency variance can be further sub-divided into:

a) Labour Idle Time Variance
b) Labour Mix Variance
c) Labour Yield Variance

Let us study these in detail.

a) Labour Idle Time Variance: Labour Idle time variance is a sub-variance

of labour efficiency variance. It is the standard wage payable during the idle hours due to
abnormal circumstance like strikes, lockout, break-down or machinery, power cut,
shortage or raw materials etc. The abnormal idle time should be separated from the
labour efficiency variance as it is due to the reasons beyond the control of workers.
Otherwise it will show inefficiency on the part of workers. This variance will always be
adverse. It is calculated as follows:
Idle Time Variance = Idle Hours X Standard Rate
ITV = IH X SR

For example, if the idle time in the data given in Illustration 7, is 20 hours, then the idle
time variance would be
Idle Time Variance = Idle Hours X Standard Rate
= 20 hours X Rs.5

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 = Rs.100 (A)

Illustration 8

The following information is supplied to you:

Standard time for a month : 4000 Hours
Standard wage rate : Rs.2.25 per hour
Number of labourers employed : 30
Average working days in a month : 25
No. of hours a worker works per day: 7 hours
Total wage bill in a month : Rs. 13125
Idle time due to power failure : 100 hours

You are required to calculate the following:

a) Labour Cost Variance
b) Labour Rate Variance
c) Labour Efficiency Variance
d) Labour Idle Time Variance

Solution
Standard time = 4000 hours
Standard wage rate = Rs.2.25
Actual time = 30 workers X 25 days X 7 hours
= 5250 hours
Total Wage bill
Actual Wage Rate = ------------------
Actual time
Rs. 13125
= ----------- = Rs. 2.50
5250 hrs.

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a) Labour Cost Variance = Standard Labour Cost – Actual Labour Cost
= (Std. Time X Std. Rate) – (Actual time X Actual Rate)
= (4000 hours X Rs. 2.25) – (5250 hours X Rs. 2.50)
= Rs.9000 – Rs. 13125
= Rs. 4125 (A)

b) Labour Rate Variance = Actual Time (Std. Labour Rate – Actual Labour Rate)
= 5250 hours (Rs.2.25 – Rs.2.50)
= 5250 X 0.25
= Rs. 1312.50 (A)

c) Labour Efficiency Variance = Standard Labour Rate (Std. Time – Actual Time)
= Rs. 2.25 (4000 hours – 5250 hours)
= Rs.2.25 X 1250 hours
= Rs. 2812.50 (A)

d) Labour Idle Time Variance = Idle Time X Standard Rate

= 100 hours X 2.25
= Rs. 225 (A)

Verification

Direct Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance
Rs. 4125 (A) = Rs.1312.50 (A) + Rs.2812.50 (A)
Rs. 4125 (A) = Rs.4125 (A)

Labour Mix Variance

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It is also known as Gang composition Variance. It is similar to Material Mix variance
and is a part of labour efficiency variance. Labour mix variance arises only when two or
more different types of workers employed and the composition of actual grade of workers
differ from the standard composition of workers. The change in the labour composition
may be due to shortage of one grade of labour. This variance indicate how much labour
cost variance is there due to the change in labour composition. It is calculated with the
help of the following formula:

Labour Mix Variance = Standard Cost of Standard Mix – Standard Cost of Actual Mix
LMV = SCSM – SCAM,
or
Labour Mix Variance = (Revised Standard – Actual Hours Worked) X Standard Rate

Symbolically,
LMV = (RSH – AHW) X SR

Where,
RSH = Actual Total Hours Worked X Standard Ratio of Workers
Or
Standard Hours of the grade
------------------------------------- X Total Actual Hours Worked
Total Standard Hours

Where,
Actual Hours Worked = Actual hours – Idle Time

If the actual hours taken are less than the revised standard hours, the variance is
favourable, and vice versa.

Illustration 9

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From the following information, calculate labour mix variance:
Standard Actual
Grade A 80 workers @ Rs. 5 per hour 100 workers @ Rs.6 per hour
Grade B 120 workers @ Rs.3 per hour 80 workers @ Rs.2 per hour
200 180

Solution

Labour Mix Variance = (Revised Standard hours – Actual Hours Paid) X Standard Rate

Standard Hours of the grade

Revised Standard Hour = ------------------------------------- X Total Actual Hours Worked
Total Standard Hours

80 2
RSH for Grade A = ------ X 180 = 72 hours or 180 hrs X ---- = 72 hrs
200 5

120 3
RSH for Grade B = -------- X 180 = 108 hours or 180 hrs X ---- = 108 hrs
200 5

LMV = (RSH – AHP) X SR

Grade A = (72 - 100) X Rs.5 = Rs.140 (A)
Grade B = (108 – 80) X Rs.3 = Rs. 84 (F)
-------------
LMV = Rs. 56 (A)
-------------

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Labour Revised Efficiency Variance (LREV)

This variance arises due to the difference between the total actual hours taken and the
total standard hours specified for the actual output. This variance is a sub-variance of
labour efficiency variance. It arises when there is difference between actual hours paid
and actual hours worked, there will be revised efficiency variance and idle time variance.
The formula for Labour Revised Efficiency Variance is:

LREV = (Standard Hours for Actual output – Revised Standard Hours ) X Standard Rate

Where,
Standard Hours of the grade
RSH = ------------------------------------- X Total Actual Hours Paid
Total Standard Hours

Or
= Total Actual Hours Paid X Standard Ratio

Labour Yield Variance (LYV)

It is similar to Material Yield Variance. It studies the impact of actual yield on labour
cost where output varies from the standard. The formula for LYV is:

Labour Yield Variance

= (Actual yield – Standard yield) X Standard labour cost per unit of output

Where,
Std. output
Std. Yield = --------------- X AHW;
Total AH

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 Std. cost
Std. labour cost per unit = ------------------
Std. Output (units)

If the standard yield is more than the actual yield the variance will be adverse and vice
versa.

Illustration 10

From the following data, calculate Labour Yield Variance

Standard time : 600 hours
Standard rate : Rs.10 per hour
Standard output : 300 units
Actual output : 225 units

Solution

Labour Yield Variance = (Actual Yield – Standard Yield) X Std. Output cost per unit
500 hrs
Standard time per unit = ----------- = 2 hours
300 units

Standard cost per unit = 2 hrs X Rs.10 = Rs.20

LYV = (Actual Yield – Std. Yield) X Std. Output per unit
= (225 units – 300 units) X Rs.20
= Rs.1500(A)

Illustration 11

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The following information is available from the records of a Company:
Standard wages Actual wages
Skilled : 90 workers @ Rs.2 per hour 80 workers @ Rs.2.50 per hour
Unskilled : 60 workers @ Rs.3 per hour 70 workers @ Rs.2 per hour
Budgeted hours : 1000 Actual hours : 900

You are required to calculate the following:

i) Labour Cost Variance
ii) Labour Rate Variance
iii) Labour Efficiency Variance
iv) Revised Labour Efficiency Variance
v) Labour Mix Variance

Solution
Type of Standard Actual
workers *Hours Rate Amount **Hours Rate Amount
Skilled 90,000 Rs.2 1,80,000 72000 Rs.2.50 1,80,000
Unskilled 60,000 Rs.3 1,80,000 63000 Rs.2.00 1,26,000
1,50,000 3,60,000 1,35,000 3,06,000

* Hours = No. of Workers X Budgeting Hours

**Hours = No. of Workers X Actual Hours

i) Labour Cost Variance

= (Std. Hours of actual output X Std. Rate) – (Actual Hours X Actual Rate)
Skilled = (90,000 X Rs.12) – (72,000 X Rs.2.50) = NIL
Unskilled = (60,000 X Rs.3) – (63,000 X Rs.2.50) = Rs.54,000 (F)
------------------
LCV = Rs. 54,000(F)
-------------------

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ii) Labour Rate Variance = (Std. Rate – Actual Rate) X Actual Hours
Skilled = (Rs.2 – Rs.2.50) X 72000 = Rs.36000(A)
Unskilled = (Rs.3 – Rs.2) X 63000 = Rs.63000(F)
--------------
LRV = Rs.27000(F)
--------------

iii) Labour Efficiency Variance = (Std. Hours – Actual Hours) X Standard Rate
Skilled = (90,000 – 72,000) X Rs.2 = Rs.36,000 (F)
Unskilled = (60,000 – 63,000) X Rs.3 = Rs. 9,000 (A)
------------------
LEV = Rs.27,000(F)
------------------

iv) Labour Mix Variance = (Revised Std. hours – Actual Hours) X Standard Rate
where,
Standard Hours of the grade
Revised Standard Hour = ------------------------------------- X Total Actual Hours Worked
Total Standard Hours

Or
= Actual Hours X Std. Ratio

90,000 3
Skilled = ------------- X 13500 = 81000 hours or 135000 hrs X ---- = 8100 hrs
1,50,000 5

60000 2
Unskilled = ------------- X 135000 = 54000 hours or 13500 hrs X ----- = 54000 hrs
150000 5

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Labour Mix Variance = (Revised Std. Hours – Actual Hours) X Standard Rate
Skilled : (RSH – AH) X SR
= (81000 – 72000) X Rs.2 = Rs.18000 (F)
Unskilled : (54000 – 63000) X Rs.3 = Rs.27000 (A)
-----------------
LMV = Rs.9000 (A)
-----------------

iv) Labour Revised Efficiency Variance = (Std. Hrs – Revised Std. Hrs.) X Std. Rate
Skilled = (90000 – 81000) X Rs.2 = Rs.18000 (F)
Unskilled = (60000 – 54000) X Rs.3 = Rs.18000 (F)
----------------
Rs.36000 (F)
----------------

Verification
LCV = LRV + LEV
Rs.54000 = Rs.27000 (F) + 27000 (F)
Rs.54000(F) = Rs.54000(F)

LEV = LMV + LREV

Rs.27000(F) = Rs.9000(A) + Rs.36000(F)

Rs.27000(F) = Rs.27000(F)

Illustration 12
A gang of workers normally consists of 60 skilled, 30 semi-skilled and 20 unskilled.
They are paid at standard rates per hour as under:
Skilled Re.0.80
Semi-skilled Re.0.60
Unskilled Re.0.40

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In a normal working week of 40 hours, the gang is expected to produce 4000 units of
output
During the week ended 31 December, the gang consisted of 80 skilled, 20 semi-skilled
and 10 unskilled. The actual wages paid were @ Re.0.70, Re.0.65 and Re.0.30
respectively. 3200 units were produced. Four hours were lost due to abnormal idle time.

Calculate
i) Wage variance
ii) Wage Rate Variance
iii) Labour Efficiency Variance
iv) Idle Time Variance
v) Labour Mix Variance
vi) Labour Revised Efficiency Variance
vii) Labour Yield Variance

Solution

Type of Standard Actual

Workers Hours Rate Amt. Hours Rate Amt.
(Rs.) (Rs.) (Rs.) (Rs.)
Skilled 60 X 40 = 0.80 1920 80 X 40 = 3200 0.70 2240
2400
Semi-skilled 30 X 40 = 0.60 720 20 X 40 = 800 0.65 520
1200
Unskilled 20 x 40 = 0.40 320 10 X 40 = 40 0.30 120
800
Total 4400 2960 4400 2880
Std. Cost Rs. 2960
Standard Wage Rate per hour (Group) = -------------- = ---------= Rs.0.673
Std. hours 4400

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 3200 units
Std. cost of actual output = ---------------- X Rs. 2960 = Rs.2368
4000 units

Standard hours for actual output:\

2400
Skilled = --------- X 3200 = 1920 hours
4000

1200
Semi-Skilled = --------- X 3200 = 960 hours
4000

800
Unskilled = --------- X 3200 = 640 hours
4000

Actual hours paid = 4400

Actual hours worked = 3960 i.e., (4400 – 440 idle time)

Calculation of Variances:

i) Labour Cost Variance = (SC of actual output) – (Actual cost)

Skilled = Rs. 1536 – Rs.2240 = Rs. 704 (A)
Semi-Skilled = Rs. 576 – Rs.520 = Rs. 56 (F)
Unskilled = Rs. 256 – Rs.120 = Rs. 136 (F)
LCV = Rs.2368 – 2880 = Rs.512 (A)

ii) Labour Rate Variance = (SR-AR) X AHP

Skilled = (Re.0.80 – Re.0.70) X 3200 hrs. = Rs.320(F)
Semiskilled = (Re.0.60 – Re.0.65) X 800 hrs. = Rs. 40(A)

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 Unskilled = (Re.0.40 – Re.0.30) X 400hrs. = Rs. 40(F)
----------------
LRV = Rs. 320(F)
---------------

iii) Labour Efficiency Variance = (SH for Actual output – AHP X SR)
Skilled = (1920 – 3200) X Re.0.80 = Rs.1024(A)
Semi-skilled = (960 – 800) X Re.0.60 = Rs. 96(F)
Unskilled = (640 – 400) X Re.0.40 = Rs. 96(F)
---------------
LEV = Rs. 832(A)
---------------

iv) Idle Time Variance = Standard rate per hour X Idle hours
Skilled = Re.0.80 X 320hrs. = Rs.256(A)
Semi-skilled = Re.0.60 X 80hrs. = Rs. 48(A)
Unskilled = Re.0.40 X 40hrs. = Rs. 16(A)
--------------
ITV Rs.320(A)
--------------
Calculation of Idle Hours
Skilled = 80 X 4 hrs. = 320 hrs.
Semi-skilled = 20 X 4 hrs. = 80 hrs.
Unskilled = 10 X 4 hrs. = 40 hrs.

Out of the total actual hours of 4400, total idle hours are 440. Now the labour mix
variance and labour yield variance are computed on the basis of 3960 hrs.(4400hrs –
4400hrs.)

v) Labour Mix Variance = (Revised Std. hours – Actual hours worked) X Std. rate
Skilled = (2160 – 2880) X 0.80 = 576(A)

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 Semi-skilled = (1080 – 720) X 0.60 = 216(F)
Unskilled = (720 – 630) X 0.40 = 144(F)
-------------
LMV = 216(A)
-------------
Std. hrs
RSH = ------------------ X Total Hrs. AHW or Actual Hours X Std. Ratio (6:3:2)
Total std. hrs.

2400 6
Skilled = --------- X 3960 = 2160 or 3960 X ---- 2160
4400 4

1200 3
Semi-Skilled = --------- X 3960 = 1080 or 3960 X ---- = 1080
4400 11

800 2
Unskilled = --------- X 3960 = 720 or 3960 X ---- = 720
4400 11

Actual hours worked = (Normal working hours – Idle time) No. of workers

Skilled = (40 hrs. – 4 hrs.) X 80 = 2880 hrs.

Semi-skilled = (40 hrs. – 4 hrs.) X 20 = 720 hrs.

Unskilled = (40 hrs. – 4 hrs.) X 10 = 360 hrs.

Total = -------------
3960 hrs.
-------------

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iv) Labour Revised Efficiency Variance
= (Std. hrs. for actual output – Revised std. hrs.) X Std. rate
Skilled = (1920 – 2160) X 0.80 = 192(A)
Semi-Skilled = (960 – 1080) X 0.60 = 72(A)
Unskilled = (640 – 720) X 0.40 = 32(A)
------------
LREV = 296(A)
------------
4400 hrs.
Std. hours for actual output = ------------ X 3200 units = 3520 hrs
4000 units

6
Skilled : 3520 hrs. X ----- = 1920 hrs.
11
3
Semi-skilled : 3520 hrs. X ----- = 960 hrs
11
2
Unskilled : 3520 hrs. X ----- = 640 hrs.
11

Labour Yield Variance may be calculated in place of Labour Revised Efficiency

Variance as follows:

Labour Yield Variance – (Actual Yield –Std. Yield) X St. Labour cost per unit of outputs

Where,
Std. Cost 2960
Std. labour cost per unit of output = ------------------ = ----------- = 0.74

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 Std. Output 4000
Std. Output
Std. Yield = --------------------- X AHW
Total AH

LYV = (3200 – 3600) X 0.74 = 296(A)

4000
Standard Yield = ------------ X 3960 = 3600 units
4400

Check

(i) LCV = LRV + LEV 512(A) = 320(F) + 832(A)

(ii) LEV = ITV + LMV + LYV 832(A) = 320(A) + 216(A) + 296(A)

Exercises
14. From the following data, calculate all material variances:
Standard mix for 5 units of product is as follows:
Material X : 300 Units @ Rs.15 per Unit : Rs.4500
Y : 400 Units @ Rs.20 per unit : Rs.8000
Z : 500 Units @ Rs.25 per unit : Rs.12500
------------ --------------
1200 units 25,000
------------ --------------

During the month March, 2004, 10 units were actually produced and the actual material
used was as follows:
Material X : 640 Units @ Rs.17.50 per Unit : Rs.11200
Y : 950 Units @ Rs.18 per unit : Rs.17100
Z : 870 Units @ Rs.27.50 per unit : Rs.23925

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 -------------- --------------
4920 units 52,225
-------------- --------------

(Ans: MCV = Rs.2225(A), MPV = Rs.1875(A), MUV = Rs.350(A), MMV = Rs.900(F),

MYV = Rs.1250 (A), MRUV = Rs.1250)

15. In a factory 100 workers are engaged and the average rate of wages is Rs.5/per hour.
Standard working hours per week are 40 and the standard performance is 10 units per
gang hour.

During a week in April, 2004wages paid for 50 workers were Rs.5 per hour, 10 workers
at Rs.3.50 per hour and 40 workers at Rs.5.20 per hour. Actual output was 380 units.

The factory did not work for 5 hours due to breakdown of machinery.

Calculate:
Ans:
a) Labour Cost Variance Rs.8280(F)
b) Labour Rate Variance Rs.280(F)
c) Labour Efficiency Variance Rs.8000(F)
d) Labour Yield Variance Rs.818(F)
e) Idle Time Variance Rs.1000(A)

Exercises

1) Define Variance. What is variance analysis?

2) What are the methods of classification of variances?
3) Write a detailed note on the uses of variance analysis?
4) “Calculation of Variances in standard costing is not an end itself, but a means
to an end” Discuss.

- 43 -
 5) What is meant by Revision of Standards? What could be the possible reasons
for Revision of Standards.
6) Discuss material variance in detail
7) Discuss labour variances in detail
8) Write notes on the following:
i) Material Price Variance
ii) Material Mix Variance
iii) Material Usage Variance
iv) Labour Rate Variance
v) Labour Idle Time Variance
vi) Labour Efficiency Variance

10. The following standards have been set to manufacture a product

Direct materials
2 units of A at Rs.4.00 per unit 8.00
3 units of B at Rs.3.00 per unit 9.00
15 units of C at Rs.1.00 per unit 15.00
--------
32.00
Direct Labour 3 hours @ Rs.8 per hour 24.00
-------
Total Standard Prime Cost 56.00
--------

The company manufactured and sold 6,000 units of the product during the year.
Direct material costs were as follows:
12,500 units of A at Rs.4.40 per unit
18,000 units of B at Rs.2.80 per unit
88,500 units of C at Rs.1.20 per unit

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The Company worked 17,500 direct labour hours during the year. For 2500 of these
hours, the company paid Rs.12 per hour while for the remaining, the wages were paid at
the standard rate. Calculate Material Price and Usage Variances and Labour Rate and
Efficiency Variances.

11. A manufacturing concern which has adopted standard costing furnishes the following
information:
Standard
Material for 70 kg Finished Products 100 kg
Price of materials Re.1 per kg
Actual
Output 210000 kgs
Material used 280000 kgs
Cost of materials Rs.2,52,000

Calculate
a) Material Usage Variance
b) Material Price Variance
c) Material Cost Variance

12. The details about the composition and the weekly wage rate of labour force engaged
on a job scheduled to be completed in 30 weeks are as follows:-
Category of No. of Standard Actual Weekly wage
Workers Labourers Weekly wage Labourers Rate
rate
Skilled 75 60 70 70
Semi-Skilled 45 40 30 50
Unskilled 60 30 80 20

The works get completed in 32 weeks. Calculate the labour variances.

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13. The Standard Cost of Chemical mixture ~ PQ’ is as follows:
40% of material P @ Rs.400 per kg.
60% of material Q @ Rs.600 per kg.

A standard loss of 10% is normally anticipated in production. The following particulars

are available for the month of March, 2004.

180 kgs of material P have been used @ Rs.680 per kg

220 kgs of material Q have been used @ Rs.360 per kg.

The actual of production of ‘PQ’ was 369 kgs.

Calculate the following variances:

a) Material Price Variance
b) Material Usage Variance
c) Material Mix Variance
d) Material Yield Variance

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