# Labour/Labor Cost & Variance

## Labour/Labor Variance

Labour/Labor Variance implies the variances in cost incurred on Labour/Labor used for obtaining the output.

## Labour/Labor Cost

It is the cost of labor used in the manufacture of a product or service.

In general

Value = Quantity × Price

For Labour/Labor

Cost of Labour/Labor

 = Labour/Labor Time × Rate per unit time payable to labour/labor

We can say that Labour/Labor cost is influenced by two factors,

1. The time for which labour/labor is engaged
2. The wage rate payable to labour/labor.

## Illustration for explanation

Consider the following data relating to the standard costs and the actual costs incurred in relation to the manufacture of a product. This data is referred to in all the explanations below

Standard Actual
Total Idle
(Abnormal)
Productive
(Normal)
ST SR SC AT AR AC SC(AT) IT SC(IT) PT SC(PT)
Skilled
Semi-Skilled
Unskilled
200
400
150
20
15
10
4,000
6,000
1,500
240
500
220
22
14
12
5,280
7,000
2,640
4,800
7,500
2,200
24
50
22
528
700
264
216
450
198
4,320
6,750
1,980
Total 750   11,500   960 14,920 14,500 96 1,450 864 13,050
Output 7,500
SO
7,200
AO

## Where

• ST (Standard Time),
AT (Actual Time)
IT (Idle Time)
PT (Productive Time)
are in time units (hrs here)
• SR (Standard Rate) and
AR (Actual Rate)
are in monetary value per unit time (per hr here)
• SC (Standard Cost),
AC (Actual Cost)
SC(AT) (Standard Cost of Actual Time)
SC(IT) (Standard Cost of Idle Time)
SC(PT) (Standard Cost of Productive Time)
are in monetary values
• SO (Standard Output),
AO (Actual Output)
are in units in which output is expressed

## Note

• The Rate in total row is derived using the relation  Value Time
• Rate/hr (standard)
=  11,500 750

=  46 3
or 15.33
• Rate/hr (actual)
=  14,920 960

=  373 24
or 15.542

If you have to use this in calculations, use fractional value if it is simple. Otherwise use the decimal number with substantial number of digits after the decimal.

## Identities

The data in the above table while being interpreted will be addressed as below.
Standard Actual
Total Idle
(Abnormal)
Productive
(Normal)
ST SR SC AT AR AC SC(AT) IT SC(IT) PT SC(PT)
Skilled
Semi-Skilled
Unskilled
STsk
STss
STun
SRsk
SRun
SCsk
SCss
SCun
ATsk
ATss
ATun
ARsk
ARun
ACsk
ACss
ACun
SC(AT)sk
SC(AT)ss
SC(AT)un
ITsk
ITss
ITun
SC(IT)sk
SC(IT)ss
SC(IT)un
PTsk
PTss
PTun
SC(PT)sk
SC(PT)ss
SC(PT)un
Total STMix SRMix SCMix ATMix ARMix ACMix SC(AT)Mix ITMix SC(IT)Mix PTMix SC(PT)Mix
Output
SO

AO
We use the abbreviated form of labour/labor type name as subscript for identifying each labour/labor type separately and the word Mix to identify all the materials together.

STsk for standard time of labour/labor of skilled labour/labor, ATMix for total time of actual mix (all the labour/labor types together) etc.

## Gang Composition - Labour/Labor Mix

We may use various types of labour/labor in the product manufacturing process. We use the terms Labour/Labor Mix or Gang Composition to indicate that there are more than one kind of labourers/laborers involved in the production process.
• Time of Mix indicates time of all types of labour/labor taken together.
• Cost of Mix indicates cost of all types of labour/labor taken together.
• Rate of Mix indicates the weighted average rate of all types of labor/labour rates taking time as weights.

Some examples we come across in problem solving on labour/labor variances:

1. A production process needs some skilled, some semi-skilled and some un-skilled workers. We consider these three to be different types of labour/labor which would be remunerated with varying rates of pay.
2. A production process employs men, women and boys as labourers/laborers. We consider each of them to be a particular type. It is obvious that each would be remunerated with varying rates of pay.

If the rate of pay planned to be paid (standard) for all the different types of labour/labor is the same, and the rate paid to all is the same, such a classification would not be of much use.

# Standards

## Standard

• A basis for comparison
• The ideal in terms of which something can be judged
• a reference point against which other things can be evaluated
• criterion

The following terms involving standards are relevant to this topic.

• ## Standard (Labour/Labor) Time ~ ST

The Labour/Labor time of a particular type of labour/labor required for manufacturing the product.

It may be expressed for one or more units output.

1. Standard Labour/Labor time required for producing 1 unit is 15 minutes.
2. Standard output is 120 units and the Labour/Labor time required for the same is 1,800 minutes or 30 hours.
• ### Standard Labor/Labour Time ~ STLab

The time relating to each type of labour/labor
• ### Standard Time of Mix

The total time of all types of labour/labor together

Standard Time of Mix

 STMix = ΣSTLab Sum of the Standard Times of Individual Labour/Labor types

Where there is only one type of labour/labor STMix = STLab.

From the data in the illustration

 STsk = 200 hrs STss = 400 hrs STus = 150 hrs STMix = 750 hrs
• ## Standard Input

The total labour/labor time of all types of laborers as per standards.

 SI = ΣSTLab = STMix

From the data in the illustration

 SI = STMix = 750 hrs
• ## Standard Mix Ratio or (Standard Gang Composition Ratio)

Where there are two or more types of labour/labor involved in the production process, Standard Mix Ratio or Gang Composition Ratio indicates the ratio in which the times of labour/labor types are to be combined, if the production process is carried on according to plans.

This ratio can be for labour/labor times or costs.

### Standard Time Mix Ratio

 STMR = STLab1 : STLab2 : ... Ratio of Standard Times of Individual Labour/Labor types

This ratio is also identified as Gang Composition Ratio.

### Standard Cost Mix Ratio

 SCMR = SCLab1 : SCLab2 : ... Or = STLab1 × SRLab1 : STLab2 × SRLab2 : ... Ratio of Standard Costs of Individual Labour/Labor types

From the data in the illustration,

 STMR = STsk : STss : STus = 200 hrs : 400 hrs : 150 hrs = 4 : 8 : 3 SCMR = SCsk : SCss : SCus = 4,000 : 6,000 : 1,500 = 8 : 12 : 3
• ## Standard Rate of Pay

The rate of wages to be paid to the Labourers/Laborers used in the production process.
• ### Standard Rate of Pay of Labour/Labor ~ SRLab

The Rate of Pay for each labour/labor type
• ### Standard Rate of Pay of Mix ~ SRMix

The weighted average standard rate of all labour/labor types taking times as weights.
SRMix =  STLab1 × SRLab1 + STLab2 × SRLab2 + ... STLab1 + STLab2 + ...
=  Σ(STLab × SRLab) ΣSTLab
=  ΣSCLab ΣSTLab
=  SCMix STMix

Where there is only one type of labour/labor SRMix = SRLab.

From the data in the illustration

SRsk = 20/hr
SRus = 10/hr

SRMix =  11,500 750 hrs
=  46 3
/ hr or 15.542/hr
• ## Standard Cost of Labour/Labor

The cost of labour/labor to be incurred on manufacturing the standard output.

It is the cost for standard labour/labor time taken at the standard rate of pay.

 SC = ST × SR Standard Labor/Labour Time × Standard Rate of Pay
• ### Standard Cost of Labour/Labor

The cost of each labour/labor type distinctly  SCLab = STLab × SRLab
• ### Standard Cost of Mix

The standard cost of all the labour/labor types together  SCMix = STMix × SRMix Standard Time of Mix × Standard Rate of Mix Or = ΣSCLab Sum of the Standard Costs of Individual Labour/Labor Types

Where there is only one labour/labor type SCMix = SCLab.

From the data in the illustration

SCsk = STsk × SRsk
= 200 hrs × 20/hr = 4,000
= 400 hrs × 15/hr = 6,000
SCus = STus × SRus
= 150 hrs × 10/hr = 1,500
SCMix = 11,500
SCMix = STMix × SRMix
= 750 hrs ×  46 3
/hr
= 11,500
• ## Standard Output/Production

It is the output that is achieved using the standard Labour/Labor time.

From the data in the illustration

SO = 7,500 units

• ## Standard Cost for Unit Output/Yield

The standard labor/labour cost incurred per unit output
=  Standard Cost Standard Output
SC/UO =  SC SO

SC/UO ≡ SC/UY. Output is also addressed to as yield.

• ### for each Labour/Labor Type separately

SC/UOLab =  SCLab SO
• ### for all Labour/Labor Types together

The standard cost incurred per unit output over all the labour/labor types taken together.
SC/UOMix =  SCMix SO

From the data in the illustration,

SC/UOsk =  SCsk SO
=  4,000 7,500 units
=  8 25
/unit
SC/UOss =  SCss SO
=  6,000 7,500 units
= 0.8/unit
SC/UOus =  SCus SO
=  1,500 7,500 units
= 0.2/unit
SC/UOMix =  SCMix SO
=  11,500 7,500 units
=  23 15
/unit

# Actuals

The term actual relates to the data pertaining to the actual activity. The following terms involving actuals are relevant to this topic.

Where there is a loss of labor/labour time on account of abnormal reasons, generally called idle time or more specifically abnormal idle time, we segregate the actual data to reflect the loss of time.

• Actual Time = Total Time
• Idle Time = Time Lost on account of abnormal reasons
• Productive Time = Effective Time Utilised
• ## Actual Time (of Labour/Labor) ~ AT

The Labour/Labor time actually worked during the process of manufacturing the product.

It may be expressed in terms for one or more units output.

1. Actual Labour/Labor time worked in producing 1 unit is 24 minutes.
2. Actual output is 200 units and the Labour/Labor time worked for the same is 3,840 minutes or 64 hours.
• ### Actual Time of Labor/Labour ~ ATLab

The time of each type of labour/labor
• ### Actual Time of Mix ~ ATMix

The time of all the labor/labour types together  ATMix = ΣATLab Sum of the Actual Times of Individual Labour/Labor Types

Where there is only one type of labour/labor ATMix = ATLab.

From the data in the illustration

 ATsk = 240 hrs ATss = 500 hrs ATus = 220 hrs ATMix = 960 hrs
• ## Idle Time

The Labour/Labor time actually lost on account of abnormal reasons. This represents the labour/labor time whose cost should be treated as abnormal cost and has to be eliminated from the cost of the output.
• ### Idle Time of Labor/Labour ~ ITLab

The idle time loss relating to each type of labour/labor
• ### Idle Time of Mix

The idle time relating to all the labor/labour types together  ITMix = ΣITLab Sum of the Idle Times of Individual Labour/Labor Types

Where there is only one type of labour/labor ITMix = ITLab.

From the data in the illustration

 ITsk = 24 hrs ITss = 50 hrs ITus = 22 hrs ITMix = 96 hrs
• ## Productive Time

The Labour/Labor time that was actually useful for the process of manufacturing the product after eliminating the idle time.
• ### Productive Time of Labor/Labour ~ PTLab

The Productive time of each type of labour/labor type

It is the net time remaining after deducting the idle time from the actual time.

 PTLab = ATLab − ITLab Actual Time for a labour/labor type − Idle Time the labour/labor type
• ### Productive Time of Mix

The productive time over all the labor/labour types together  PTMix = ΣPTLab Sum of the Productive Times of Individual Labour/Labor Types Or = ATMix − ITMix Actual Time of Mix − Idle Time of Mix

From the data in the illustration

 PTMix = PTsk + PTss + PTus = 216 hrs + 450 hrs + 198 hrs = 864 hrs

Where there is only one type of labour/labor PTMix = PTLab.

From the data in the illustration

 PTsk = ATsk − ITsk = 240 hrs − 24 hrs = 216 hrs PTss = ATss − ITss = 500 hrs − 50 hrs = 450 hrs PTus = ATus − ITus = 220 hrs − 22 hrs = 196 hrs PTMix = 865 hrs PTMix = ATMix − ITMix = 960 hrs − 96 hrs = 864 hrs

### Where there are no losses

Where there is no idle time loss, all of actual time is productive time.

PTsk = ATsk
PTss = ATss
PTus = ATus
PTMix = ATMix

• ## Actual Input

The productive time of labour/labor actually worked.

 AI = ΣPTLab = PTMix

From the data in the illustration

 AI = PTMix = 864 hrs

### Where there are no losses

Where there is no idle time loss, the total time is productive time.

AI = PTMix = ATMix

• ## Actual Mix Ratio or (Actual Gang-Composition Ratio)

Where there are two or more types of Labourers/Laborers involved in the production process, Actual Mix Ratio or Gang-Composition Ratio indicates the ratio of the productive time for which the Labour/Labor types are actually employed.

It is the ratio of the actual productive labour/labor time of various labour/labor types making up the mix/gang.

This ratio can be for labour/labor times or costs.

### Actual Time Mix Ratio

 ATMR = ATLab1 : ATLab2 : ... Ratio of Actual Times of Individual Labour/Labor types

This ratio is also identified as Gang Composition Ratio.

### Actual Cost Mix Ratio

 ACMR = PCLab1 : PCLab2 : ... Or = PTLab1 × SRLab1 : PTLab2 × SRLab2 : ... Ratio of Actual (Productive time) Costs of Individual Labour/Labor types

From the data in the illustration,

 ATMR = PTsk : PTss : PTus = 216 hrs : 450 hrs : 198 hrs = 12 : 25 : 11 ACMR = PCsk : PCss : PCus = PTsk × ARsk : PTss × ARss : PTus × ARus = 216 hrs × 22/hr : 450 hrs × 14/hr : 196 hrs × 12/hr = 4,752 : 6,300 : 2,352 = 132 : 175 : 66
• ## Actual Rate of Pay

The rate of wages actually paid to the labourers/laborers employed.
• ### Actual Rate of Labour/Labor ~ ARLab

The rate paid/payable to each distinct labour/labor type
• ### Actual Rate of Mix ~ ARMix

The weighted average actual rate of all types of labour/labor types taking times as weights.
ARMix =  ATLab1 × ARLab1 + ATLab2 × ARLab2 + ... ATLab1 + ATLab2 + ...
=  Σ(ATLab × ARLab) ΣATLab
=  ΣACLab ΣATLab
=  ACMix ATMix

Where there is only one labour/labor type ARMix = ARLab.

From the data in the illustration

ARsk = 22/hr
ARus = 12/hr

ARMix =  ACMix ATMix
=  14,920 960 hrs
=  373 24
/hr (Or) 15.5417/hr
• ## Actual Cost

The actual cost of labour/labor incurred for employing labour/labor for the actual time for which wages are payable.

It is the value of actual labour/labor time valued at the actual rate of pay.

 AC = AT × AR Actual Time × Actual Rate
• ### Actual Cost for Labor/Labour type

The cost of each labor/labour type distinctly

ACLab = ATLab × ARLab

• ### Actual Cost of Mix

The actual cost for all labour/labor types together  ACMix = ATMix × ARMix Actual Time of Mix × Actual Rate of Mix Or = ΣACLab Sum of the Actual Costs of Individual Labour/Labor types
Where there is only one type of labour/labor ACMix = ACLab

From the data in the illustration

ACsk = ATsk × ARsk
= 240 hrs × 22/hr = 5,280
= 500 hrs × 14/hr = 7,000
ACus = ATus × ARus
= 220 hrs × 12/hr = 2,640
ACMix = 14,920
ACMix = ATMix × ARMix
= 960 hrs ×  373 24
/hr
= 14,920
• ## Actual Cost of Productive Labour/Labor Time

The actual cost of labour/labor incurred for the productive time for which the labour/labor is utilised.

It is the value of Productive labour/labor time valued at the actual rate of pay.

Productive Cost

 = Productive Time × Actual Rate of Pay

PC = PT × AR

The value of actual (total) cost of labour/labor (AC) is used in identifying cost and price variances. Productive labour/labor cost is not used anywhere in finding variances. Thus its calculation is not considered.

• ## Actual Output ~ AO

It is the output that is actually achieved using the actual Labour/Labor time.

From the data in the illustration,

AO = 7,200 units

• ## Standard Cost of Idle Labour/Labor Time

The standard cost of idle labor/labour time i.e. labour/labor time lost on account of abnormal reasons.

It is arrived at by valuing the idle labour/labor time at the standard rate.

Standard Cost of Idle Time

 = Idle Time × Standard Rate of Pay

SC(IT) = IT × SR

Where more than one type of labour/labor is used for producing the output, we recognise or identify

• ### for each labour/labor type separately ~ SC(IT)Lab

The cost of each labor/labour type separately by valuing the idle time lost at the standard rate of pay as Standard Cost of Idle Time

From the data in the illustration,

 SC(IT)sk = ITsk × SRsk = 24 hrs × 20/hr = 480 SC(IT)ss = ITss × SRss = 50 hrs × 15/hr = 750 SC(IT)us = ITus × SRus = 22 hrs × 10/hr = 220
• ### for all labour/labor types together ~ SC(IT)Mix

The cost of all the labor/labour type together as Standard Cost of Idle Time of Mix

Standard Cost of Idle Time of Mix

 = Sum of the Standard Costs of Idle Time of Individual Labour/Labor types

SC(IT)Mix = SC(IT)1 + SC(IT)2 + ...

From the data in the illustration,

 SC(IT)Mix = SC(IT)sk + SC(IT)se + SC(IT)us = 480 + 750 + 220 = 1,450

## SC(IT)Mix ≠ ITMix × SRMix

The formula ITMix × SRMix would not give the SC(IT)Mix.

This is for the reason that SRMix is the weighted average of Standard Rates taking standard times (ST) as weights and the present calculation considers actual times (AT).

• ## Standard Cost of Productive Labour/Labor Time

The standard cost of productive labor/labour time utilised.

It is arrived at by valuing the productive labour/labor time at the standard rate.

Standard Cost of Productive Time

 = Productive Time × Standard Rate of Pay

SC(PT) = PT × SR

Where more than one type of labour/labor is used for producing the output, we recognise or identify

• ### for each labour/labor type separately ~ SC(PT)Lab

The cost of each labor/labour type separately by valuing the total time utilised at the standard rate of pay as Standard Cost of Productive Time

From the data in the illustration,

 SC(PT)sk = PTsk × SRsk = 216 hrs × 20/hr = 4,320 SC(PT)ss = PTss × SRss = 450 hrs × 15/hr = 6,750 SC(PT)us = PTus × SRus = 198 hrs × 10/hr = 1,980
• ### for all labour/labor types together ~ SC(PT)Mix

The cost of all the labor/labour type together as Standard Cost of Productive Time of Mix

Standard Cost of Productive Time of Mix

 = Sum of the Standard Costs of Productive Time of Individual Labour/Labor types

SC(PT)Mix = SC(PT)1 + SC(PT)2 + ...

From the data in the illustration,

 SC(PT)Mix = SC(PT)sk + SC(PT)se + SC(PT)us = 4,320 + 6,750 + 1,980 = 13,050

## SC(PT)Mix ≠ PTMix × SRMix

The formula PTMix × SRMix would not give the SC(PT)Mix.

This is for the reason that SRMix is the weighted average of Standard Rates taking standard times (ST) as weights and the present calculation considers actual times (AT).

# Budget/Budgeted

## Budget

• a depiction of a future activity in quantitative terms.
1. ### Production Time Budget

A Production Time Budget indicates the time required for achieving a planned output over a future period or production process.
2. ### Cash Budget

A cash budget indicates the inflow and outflow of cash over a certain future period.
3. ### Labour/Labor Cost Budget

A labour cost budget indicates the expenditure on account of labour/labor that is to be incurred over the budget period.

## Budgeted

• relates to a budget

By the term Budgeted Data in this topic, we mean the data pertaining to a specified budget indicating a level of activity that has been planned to be achieved.

The following terms involving budgets are relevant to this topic.

• ## Budgeted Output/Production

It is the output that is planned to be achieved during a period through the production process.
• ## Budgeted Labour/Labor Time

It is the standard Labour/Labor time required to be input into the production process for achieving the budgeted output.

Budgeted Labour/Labor Time

 BT = ST/UO × BO Standard Labour/Labor Time for unit output × Budgeted Output
• ## Budgeted Rate of Pay

Budgets are prepared as per standards. As such Budgeted Rate is nothing but standard rate.

BR = SR

• ## Budgeted Labour/Labor Cost

The cost of Labour/Labor to be incurred for manufacturing the budgeted output. It is the value of budgeted Labour/Labor time taken at the standard rate of pay.

Budgeted Labour/Labor Cost

 BC = BT × SR Budgeted Labour/Labor Time × Standard Rate

# Budgeted vs Standard

Budgeted indicates a specific level of activity and Standard may indicate any level of activity.

## Examples

1. Budgeted Output is the output that is planned to be achieved by the organisation in a given period/process and Standard Output is that output for which the standards are expressed.
2. Standard Cost gives an idea of how much each unit of the product should cost under normal circumstances. Budget Cost gives an idea of the cost that should be incurred for bringing out the budget quantity of output (over a certain period or in a certain process) under normal circumstances.

Sometimes, we use the terms Budgeted and Standard synonymously, but they need not be the same.

## For analysing variances, we need standards

In analysing variances we need the data relating to the standards, i.e. data relating to the standard quantity (SQ), price (SP) and output (SO).

## Budgets are always as per the standard

It should be noted that the budgeted data is always based on standards. Standards are fixed for each unit of production and budgeted data is relevant to a particular production level. Standards may be expressed for any production level (1 unit, 2 units, 10 units, ...).

Since budgeted data is standard data for a particular production level we do not need separate data for the standard when the budgeted data is known.

## SO = BO

Standard Budgeted Actual
ST SR SC BT BR BC AT AR AC
Men 120 8 960 120 8 960 124 8.5 1,054
Output 14
SO
14
BO
14
AO
The actual output, the standard output and the budgeted output are the same i.e. 14 units.

## SO ≠ BO

The standard output and the budgeted output are not the same.
Standard Budgeted Actual
ST SR SC BT BR BC AT AR AC
Skilled Workers 1,200 8 9,600 3,000 8 24,000 720 9 6,480
Output 10
SO
15
BO
20
AO
The actual output (20 units) is not equal to the standard output (10 units) as well as the budgeted output (15 units).