Labour/Labor Variances - Accounting - Recording Journal Entries

Page L16

Using 7 Ledger Accounts

This the most detailed methodology for recording the labour/labor variances. All the variances are recorded in this method.

Ledger Accounts Used

The ledger accounts used for recording the transactions are
  • Labour/Labor Mix/Gang-Composition Variance a/c (LMV/GCV)
  • Labour/Labor Yield/Sub-Efficiency Variance a/c (LYV/LSEV)
  • Labour/Labor Efficiency Variance a/c (LEV)
  • Labour/Labor Idle Time Variance a/c (LITV)
  • Labour/Labor Usage/Gross-Efficiency Variance a/c (LUV/LGEV)
  • Labour/Labor Rate of Pay Variance a/c (LRPV)
  • Labour/Labor Cost Variance a/c (LCV)

Mix/Gang-Composition Variance

This may be identified at the time of allocating labour/labor time as to direct and indirect. It is generally identified and recorded after the production is completed i.e. at the time of transfer of completed production to finished goods stock.

The transactions with regard to accounting for labour/labor Mix/Gang-Composition variance would be.

  1. Recording Mix/Gang-Composition Variance.
  2. Transferring normal part of the variances to relevant accounts.
  3. Transferring abnormal part of the variances to LEV a/c.

When the Variance is Adverse

Journal
Particulars
WIP a/c
FOHC a/c
LMV/GCV a/c
To WLC a/c
Dr
Dr
Dr
[For the value of direct and indirect labour/labor and the adverse mix variance thereon identified and recorded at the time of allocation of labour/labor cost.]
FGLC a/c
LMV/GCV a/c
To WIP a/c
Dr
Dr
[For the value of goods produced and the adverse labour/labor mix variance thereon identified and recorded at the time of completion of production.]
WIPC a/c
FGLC a/c
To LMV/GCV a/c
Dr
Dr
[For transfer/adjustment of normal part of the adverse mix variance to relevant accounts.]
LEV a/c
To LMV/GCV a/c
Dr
[For transfer of abnormal part of the unfavorable mix variance to Labour/Labor Efficiency Variance account.]

When the Variance is Favorable

Journal
Particulars
WIP a/c
FOHC a/c
To WLC a/c
To LMV/GCV a/c
Dr
[For the value of direct and indirect labour/labor and the favourable mix/gang-composition variance thereon identified and recorded at the time of allocation of labour/labor cost.]
FGLC a/c
To WIP a/c
To LMV/GCV a/c
Dr
[For the value of goods produced and the favorable mix/gang-composition variance thereon identified and recorded at the time of completion of production.]
LMV/GCV a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For transfer/adjustment of normal part of the favorable mix/gang-composition variance to relevant accounts.]
LMV/GCV a/c
To LEV a/c
Dr
[For transfer of abnormal part of the favourable mix/gang-composition variance to Labour/Labor Efficiency Variance account.]

Yield/Sub-Efficiency Variance

This is identified and recorded after the production is completed i.e. at the time of transfer of completed production to finished goods stock.

The transactions with regard to accounting for labour/labor Yield/Sub-Efficiency variance would be.

  1. Recording Yield Variance.
  2. Transferring normal part of the variances to relevant accounts.
  3. Transferring abnormal part of the variances to LEV a/c.

When the Variance is Adverse

Journal
Particulars
FGLC a/c
LYV/LSEV a/c
To WIP a/c
Dr
Dr
[For the value of goods produced and the adverse yield variance thereon identified and recorded at the time of completion of production.]
WIPC a/c
FGLC a/c
COS a/c
To LYV/LSEV a/c
Dr
Dr
Dr
[For transfer/adjustment of normal part of the adverse yield variance to the relevant accounts.]
LEV a/c
To LYV/LSEV a/c
Dr
[For transfer of abnormal part of the unfavorable yield variance to the Labour/Labor Efficiency Variance account.]

When the Variance is Favorable

Journal
Particulars
FGLC a/c
To WIP a/c
To LYV/LSEV a/c
Dr
[For the value of goods produced and the favourable/favorable yield variance thereon identified and recorded at the time of completion of production.]
LYV/LSEV a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For transfer/adjustment of normal part of the favorable yield variance to relevant accounts.]
LYV/LSEV a/c
To LEV a/c
Dr
[For transfer of abnormal part of the favourable yield variance to the Labour/Labor Efficiency Variance account.]

Efficiency Variance (Consolidation Account)

The total variance in the Efficiency Variance account represents abnormal variance. This is to be transferred to the Usage/Gross-Efficiency Variance account.

There is only one transaction in such a case.

  1. Transferring Abnormal Variance to Usage/Gross-Efficiency Variance Account.

When the Variance is Adverse

Journal
Particulars
LUV/LGEV a/c
To LEV a/c
Dr
[For the total adverse efficiency variance transferred to usage/gross-efficiency variance account.]

When the Variance is Favorable

Journal
Particulars
LEV a/c
To LUV/LGEV a/c
Dr
[For the total favourable/favorable efficiency variance transferred to usage/gross-efficiency variance account.]

Idle Time Variance

The Idle time variance is identified and recorded at the time the wages are being segregated as to direct or indirect. They may also be identified when the factory overheads are being absorbed into production as well as during and on the completion of the production process.

The following transactions can be identified with regard to accounting for labour/labor rate of pay variance.

  1. Recording Labour/Labor Idle Time Variance.
  2. Transferring the variance to LUV/LGEV a/c.

When the Variance is Adverse

Journal
Particulars
LITV a/c
To WLC a/c
Dr
[For the abnormal loss of idle time not allocated either as direct or indirect wages identified and recorded from the wage ledger control account.]
LITV a/c
To FOHC a/c
Dr
[For the abnormal loss of idle time from the labor time allocated as indirect labour to factory identified and recorded from the factory overhead control account.]
LITV a/c
To WIP a/c
Dr
[For the abnormal loss of idle time from the labor time allocated as direct labour identified and recorded from the work in progress control account.]
LUV/LGEV a/c
To LITV a/c
Dr
[For transfer of idle time variance to the Labour/Labor Usage/Gross-Efficiency Variance account.]

When the Variance is Favorable

This variance is always negative or unfavorable and cannot be positive or favourable.

Usage/Gross-Efficiency Variance (Consolidation Account)

The total variance in the Usage/Efficiency Variance account represents abnormal variance. This is to be transferred to the Cost Variance account.

There is only one transaction in such a case.

  1. Transferring Abnormal Variance to Cost Variance Account.

When the Variance is Adverse

Journal
Particulars
LCV a/c
To LUV/LGEV a/c
Dr
[For the total adverse usage variance transferred to cost variance account.]

When the Variance is Favorable

Journal
Particulars
LUV/LGEV a/c
To LCV a/c
Dr
[For the total favourable/favorable usage variance transferred to cost variance account.]

Rate of Pay Variance

The Rate of Pay variance is identified and recorded at the time the wages are being recorded in the cost ledgers.

The transactions with regard to accounting for labour/labor rate of pay variance would be:

  1. Recording Labour/Labor Rate of Pay Variance.
  2. Transferring Normal part of the variance to relevant accounts.
  3. Transferring abnormal part of the variance to LCV a/c.

When the Variance is Adverse

Journal
Particulars
WLC a/c
LRPV a/c
To GLA a/c
Dr
Dr
[For wages paid and payable and the adverse rate of pay variance thereon identified and recorded at the time of recording wages in cost ledgers.]
WIPC a/c
FGLC a/c
COS a/c
To LRPV a/c
Dr
Dr
Dr
[For transfer/adjustment of normal part of the adverse rate of pay variance to relevant accounts.]
LCV a/c
To LRPV a/c
Dr
[For transfer of abnormal part of the unfavorable rate of pay variance to Labour/Labor Cost Variance account.]

When the Variance is Favorable

Journal
Particulars
WLC a/c
To GLA a/c
To LRPV a/c
Dr
[For wages paid or payable and favourable price variance thereon identified and recorded at the time of recording wages in cost ledgers.]
LRPV a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For transfer/adjustment of normal part of favorable rate of pay variance to relevant accounts.]
LRPV a/c
To LCV a/c
Dr
[For transfer of abnormal part of favourable rate of pay variance to LCV a/c.]

Cost Variance (Consolidation Account)

The total variance in the Cost Variance account represents abnormal variance. This is to be transferred to the Costing Profit and Loss account.

There is only one transaction in such a case.

  1. Transferring Abnormal Variance to Costing Profit and Loss Account.

When the Variance is Adverse

Journal
Particulars
C P&L a/c
To LCV a/c
Dr
[For the total adverse cost variance transferred to costing profit and loss account.]

When the Variance is Favorable

Journal
Particulars
LCV a/c
To C P&L a/c
Dr
[For the total favourable/favorable cost variance transferred to costing profit and loss account.]

Using 5 Ledger Accounts

In the following situations, we find only the Labour/Labor Efficiency Variance a/c being used without the use of Labour/Labor Mix/Gang-Composition Variance or the Labour/Labor Yield/Sub-Efficiency accounts.
  • Where there is only one labour/labor type in use all efficiency variance is nothing but yield variance. As such there is no need to measure the yield/sub-efficiency variance separately.
  • Where the organisation does not intend to segregate efficiency variance into mix/gang-composition variance and yield/sub-efficiency variance, it would avoid using the mix/gang-composition and yield/sub-efficiency variance accounts.

    This is possible since the efficiency variance can be calculated straight away using a formula. In such a case, the efficiency variance account would not be a consolidation account.

Ledger Accounts Used

The ledger accounts used for recording the transactions are
  • Labour/Labor Efficiency Variance a/c (LEV)
  • Labour/Labor Idle Time Variance a/c (LITV)
  • Labour/Labor Usage/Gross-Efficiency Variance a/c (LUV/LGEV)
  • Labour/Labor Rate of Pay Variance a/c (LRPV)
  • Labour/Labor Cost Variance a/c (LCV)

Transactions relating to LRPV, LITV, LUV/LGEV and LCV would be the same as in the case of using 7 ledger accounts.

The LEV a/c which is a consolidation account when 7 ledger accounts are used now becomes a regular account. The transactions relating to Labour/Labor Efficiency would be

In such a case, the transactions would be

  1. Recording the Efficiency/Usage variance.
  2. Transferring Normal part of Efficiency Variance to relevant accounts.
  3. Transferring Abnormal part of Efficiency/Usage Variance to Cost Variance account.

Efficiency variance

When the Variance is Adverse

Journal
Particulars
FGLC a/c
LEV a/c
To WIP a/c
Dr
Dr
[For the value of goods produced and the adverse efficiency variance thereon identified and recorded after completion of production.]
WIP a/c a/c
FGLC a/c
COS a/c
To LEV a/c
Dr
Dr
Dr
[For transfer/adjustment of normal part of the adverse efficiency variance to relevant accounts.]
LCV a/c
To LEV/LUV a/c
Dr
[For transfer/adjustment of normal part of the adverse efficiency variance to relevant accounts.]

When the Variance is Favorable

Journal
Particulars
FGLC a/c
To WIP a/c
To LEV a/c
Dr
[For the value of goods produced and the favourable efficiency variance thereon identified and recorded at the time of completion of production.]
LEV a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For transfer/adjustment of normal part of the favorable efficiency variance to relevant accounts.]
LEV a/c
To LCV a/c
Dr
[For transfer of abnormal part of the favourable efficiency variance to the Labour/Labor Cost Variance account.]

Using 4 Ledger Accounts

Where the organisation intends to avoid using the Usage/Gross-Efficiency Variance account and there is no further analysis of the Efficiency variance into mix/gang-composition and yield/sub-efficiency either on account of a deliberate decision not to or on account of there being only one type of labour/labor in use, there would be only four ledger accounts in use for recording labor/labour variances.

Ledger Accounts Used

The ledger accounts used for recording the transactions are
  • Labour/Labor Efficiency Variance a/c (LEV)
  • Labour/Labor Idle Time Variance a/c (LITV)
  • Labour/Labor Rate of Pay Variance a/c (LRPV)
  • Labour/Labor Cost Variance a/c (LCV)

The only difference between using 5 ledger accounts and 4 ledger accounts is the absence of the Usage/Gross-Efficiency variance account. For this reason, the abnormal variance from the LEV a/c and LITV a/c would be transferred to the Cost variance a/c instead of the Usage/Gross-Efficiency a/c.

Using a Single Ledger Account

Though it is theoretically possible to find and therefore record the total variance using only the Labour/Labor Cost Variance a/c, it does not sound prudent. Deciding the normal and abnormal part of the variance would be erroneous in such a case.

Cost Variance a/c would be a regular account instead of a consolidation account in such a case. The transactions that would be relevant to this account would be

  1. Recording the total Cost Variance
  2. Transferring Normal part of the Variance to relevant accounts.
  3. Transferring Abnormal part of the Variance to Costing Profit & Loss account.

Cost Variance

When the Variance is Adverse

Journal
Particulars
FGLC a/c
LCV a/c
To WIP a/c
Dr
Dr
[For the value of goods produced and the adverse cost variance thereon identified and recorded at the time of completion of production.]
WIP a/c
FGLC a/c
COS a/c
To LCV a/c
Dr
Dr
Dr
[For transfer/adjustment of normal part of the adverse cost variance to the relevant accounts.]
CP&L a/c
To LCV a/c
Dr
[For transfer of abnormal part of the unfavorable cost variance to the Costing P&L a/c.]

When the Variance is Favorable

Journal
Particulars
FGLC a/c
To WIP a/c
To LCV a/c
Dr
[For the value of goods produced and the favourable cost variance thereon identified and recorded at the time of completion of production.]
LCV a/c
To WIP a/c
To FGLC a/c
To COS a/c
Dr
[For transfer/adjustment of normal part of the favorable cost variance to the relevant accounts.]
LCV a/c
To CP&L a/c
Dr
[For transfer of abnormal part of the favourable cost variance to the Costing P & L a/c.]
Author : The Edifier
Overhead Variances