Labour variances: cost, rate, efficiency, idle time and mix
Cost and Management Accounting · Unit III · Topic 13 of 18 · 4 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Formulas
SH = standard hours for actual output; AH = actual hours (paid, or worked where idle time exists); SR = standard rate; AR = actual rate; RSH = actual hours worked split in the standard ratio of grades.
| Variance | Formula |
|---|---|
| Labour cost (LCV) | (SH × SR) − (AH paid × AR) |
| Labour rate (LRV) | AH paid × (SR − AR) |
| Labour efficiency (LEV) | SR × (SH − AH worked) |
| Idle time | Idle hours × SR (always adverse) |
| Labour mix (gang) | SR × (RSH − AH worked) |
| Sub-efficiency (yield) | SR × (SH − RSH) |
Checks: LCV = LRV + LEV + idle time; LEV = mix + sub-efficiency.
2. Solved: three-grade gang (BBA, June 2025)
Standard gang: 32 skilled at Rs. 3 an hour, 12 semi-skilled at Rs. 2, 6 unskilled at Re. 1. Actual gang: 28 skilled at Rs. 4, 18 semi-skilled at Rs. 3, 4 unskilled at Rs. 2. In a 40-hour week the gang produced 1,800 standard hours.
Workings. The standard gang of 50 works 2,000 hours a week costing 40 × (96 + 24 + 6) = Rs. 5,040, i.e. Rs. 2.52 per standard hour. Output of 1,800 standard hours is shared in the standard ratio 32 : 12 : 6 to give SH. Actual hours = workers × 40 (no idle time).
| Grade | SH | SR | SH × SR | AH | AR | AH × AR | RSH |
|---|---|---|---|---|---|---|---|
| Skilled | 1,152 | 3 | 3,456 | 1,120 | 4 | 4,480 | 1,280 |
| Semi-skilled | 432 | 2 | 864 | 720 | 3 | 2,160 | 480 |
| Unskilled | 216 | 1 | 216 | 160 | 2 | 320 | 240 |
| Total | 1,800 | 4,536 | 2,000 | 6,960 | 2,000 |
- Labour cost variance = 4,536 − 6,960 = Rs. 2,424 (A).
- Labour rate variance = 1,120 × (3 − 4) + 720 × (2 − 3) + 160 × (1 − 2) = 1,120 A + 720 A + 160 A = Rs. 2,000 (A).
- Labour efficiency variance = 3 × (1,152 − 1,120) + 2 × (432 − 720) + 1 × (216 − 160) = 96 F + 576 A + 56 F = Rs. 424 (A).
- Labour mix variance = 3 × (1,280 − 1,120) + 2 × (480 − 720) + 1 × (240 − 160) = 480 F + 480 A + 80 F = Rs. 80 (F).
- Sub-efficiency variance = 3 × (1,152 − 1,280) + 2 × (432 − 480) + 1 × (216 − 240) = 384 A + 96 A + 24 A = Rs. 504 (A). Equivalently, (1,800 − 2,000) × 2.52 = 504 A.
Checks: 2,000 A + 424 A = 2,424 A; 80 F + 504 A = 424 A.
3. Solved: two grades (BBA, January 2026)
Standard per unit: grade A 30 hours at Rs. 2, grade B 20 hours at Rs. 3 (Rs. 120). For 100 units, actual: A 3,200 hours at Rs. 1.50 (4,800), B 1,900 hours at Rs. 4 (7,600); total 12,400.
| Variance | A | B | Total |
|---|---|---|---|
| Standard cost (SH 3,000 / 2,000) | 6,000 | 6,000 | 12,000 |
| Cost variance | 1,200 F | 1,600 A | 400 A |
| Rate: AH (SR − AR) | 1,600 F | 1,900 A | 300 A |
| Efficiency: SR (SH − AH) | 400 A | 300 F | 100 A |
| Mix: SR (RSH − AH), RSH 3,060 / 2,040 | 280 A | 420 F | 140 F |
| Sub-efficiency: SR (SH − RSH) | 120 A | 120 A | 240 A |
Checks: 300 A + 100 A = 400 A; 140 F + 240 A = 100 A. RSH is the actual 5,100 hours split 3 : 2.
4. Idle time variance
When workers are paid for hours in which they could not work (power cut, waiting for material), the rate variance is computed on hours paid and the efficiency variance on hours worked; the gap is the idle time variance. Example: 1,000 hours paid, 950 worked, standard rate Rs. 10: idle time variance = 50 × 10 = Rs. 500 (A).
5. Causes
- Rate variance: wage revision or award not built into the standard; using a higher grade of worker than specified; overtime premium; change in dearness allowance.
- Efficiency variance: poor supervision, untrained or new workers, bad material, defective machines, change of method, poor working conditions, low morale; favourable from incentives or better tools.
- Idle time: breakdowns, power failure, shortage of material, waiting for instructions, strikes.
- Mix variance: shortage of a grade forcing substitution, absenteeism.
Rate variances are the personnel department’s responsibility (or uncontrollable, if due to an award); efficiency and idle time variances are the production manager’s.
How this is examined
Find SH first: for a gang, share the standard hours produced in the standard gang ratio. Then a working table, each variance with formula, per-grade figures and total, and the checks. For the 6-mark note, give the formulas and causes.
Now try the real questions: Cost and Management Accounting past question papers.