Labour variance refers to the difference between actual and budgeted labour costs. It is commonly used in production areas to analyze direct labour costs. There are several types of labour variances, including labour cost variance, labour rate variance, labour efficiency variance, labour mix variance, and labour yield variance. Labour variance analysis helps assign responsibility, control costs, and ensure efficient resource utilization, though it relies on predetermined standards and may not provide timely feedback.

1. LABOUR VARIANCE
PRESENTED BY Submitted to
ALIYA HAMZA (Roll no. 4) Pawan Kumar Gupta,
NEHLA SHERIN (Roll no. 20) Assistant Professor, Department of Commerce,
B.COM –II YEAR MGGAC, Mahe

2. DEFINITION:
• Labour variance refers to a situation in which actual costs of labour differ from projected
or budgeted labour costs.
• A labour variance arises when the actual expense associated with a labour activity
varies (either better or worse) from the expected amount. The expected amount is
typically a budgeted or standard amount.
• The labour variance concept is most commonly used in production area, where it is
called a Direct Labour Variance.

3. TYPES OF LABOUR VARIANCE
• Labour Cost Variance (LCV):
It is the difference between the standard cost of labour allowed (as per the
standard laid down) for the actual output achieved and the actual cost of labour employed.
It is also called wages variance. It is further divided into following variances:
• Labour Rate Variance (LRV):
It is the measure of difference between standard rate of wage specified
and the actual rate of wage paid.
• Labour Efficiency Variance (LEV):
It is a part of LCV. It is the difference between the standard labour hours
specified and actual labour hours spent.

4. • Labour Mix Variance (LMV):
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
• Labour Yield Variance (LYV):
The Labour yield variance is one of the components of labour efficiency
variance, which results from the difference between the actual output of worker and
standard output of worker specified.

5. FORMULAS OF LABOUR VARIANCE
• Labour Cost Variance (LCV):
LCV = (SH * SR) – (AH * AR)
• Labour Rate Variance (LRV):
LRV=(SR – AR) AH
• Labour Efficiency Variance (LEV):
LEV=(SH – AH) SR
• Labour Mix Variance (LMV):
LMV=(RSH – AH) SR
RSH=Standard hours/ Total Standard hours * Total Actual Hours
• Labour Yield Variance (LYV):
LYV=(Standard yield – Actual yield) Average Standard Rate p.u.

6. EXAMPLE
• Problem:
The information regarding the composition and hourly wage rates of labour force
engaged on a job scheduled to be completed in 30 days are as follows:
Category of Standard No. of Hourly wage rate Actual No. of Hourly wage
workers workers per worker workers rate per
worker
Skilled 75 Rs. 6 70
Rs. 7
Semi-skilled 45 “ 4 30 “ 5
Unskilled 60 “ 3 80 “ 2

7. • Solution:
1. LCV=(SH * SR) – (AH * AR)
SH = Standard Man Hours
Category of workers Standard Man Hours Actual Man Hours
Skilled 75 * 30 = 2250 70 * 32 = 2240
Semi-skilled 45 * 30 = 1350 30 * 32 = 960
Unskilled 60 * 30 = 1800 80 * 32 = 2560
5400 5760
LCV:
Skilled = (2250 * 6) – (2240 * 7)
= 13500 – 15680 = 2180 (A)
Semi-skilled = (1350 * 4) – (960 * 5)
= 5400 – 4800 = 600 (F)
Unskilled = (1800 * 3) – (2560 * 2)
=5400 – 5120 = 280 (F)
Total LCV 1300 (A)
2. LRV= (SR – AR) AH
Skilled = (6 – 7) 2240 = 2240 (A)
Semi-skilled = (4 – 5) 960 = 960 (A)
Unskilled = ( 3 – 2) 2560 =2560 (F)
Total LRV 640 (A)

8. • Solution:
3. LEV = (SH – AH) SR
Skilled = (2250 – 2240) 6 = 60 (F)
Semi-skilled = ( 1350 – 960) 4 = 1560 (F)
Unskilled = (1800 – 2560) 3 = 2280 (A)
Total LEV 660 (A)
4. LMV = (RSH – AH) SR
RSH = Standard Hours/ Total Standard Hours * Total Actual Hours
RSH =
Skilled = 2250/5400 * 5760 = 2400
Semi-skilled = 1350/5400 * 5760 = 1440
Unskilled = 1800/5400 * 5760 =1920
LMV =
Skilled = (2400 – 2240) 6 = 960 (F)
Semi-skilled = (1440 – 960) 4 = 1920(F)
Unskilled = (1920 – 2560) 3 = 1920(A)
Total LMV 960 (F)
5. LSEV = (SH – RSH) SR
Skilled = (2250 – 2400) 6 = 900 (A)
Semi-skilled = (1350 – 1440) 4 = 360 (A)
Unskilled = (1800 – 1920) 3 = 360 (A)
Total LSEV 1620 (A)

9. VERIFICATION :
LCV = LRV + LEV
1300(A)= 640(A) + 660(A)
LEV = LMV + LSEV
660(A) = 960(F) +1620(A)

10. ADVANTAGES
• Variance analysis helps to assign the responsibility of the business to various persons
and departments.
• It is used as an accounting tool for cost control and helps to analyse large differences.
• Its helps the company to achieve its business target and ensure efficient utilization of the
resources of the company. Thus it helps to create value for its shareholders.

11. LIMITATIONS
• Variance analysis is done by the accounting staff at the end of each month. But it is not
helpful if the management requires the feedback faster.
• It is a much expensive activity for small businesses.
• It is based on the predetermined standards . Standards limit the operating improvement
upto a certain extend.

12. DIAGRAM
•

14. CONCLUSION
• The labour variance measures the difference between the actual and expected cost of
labour.
• An unfavourable variance means that the cost of labour was more expensive than
anticipated, while a favourable variance indicates that the cost of labour was less
expensive than planned.
• The reporting of favourable and unfavourable variances is a key component of a
command and control system, where the budget is the standard upon which
performance is judged, and variances from that budget is rewarded or penalized.

15. Thank you