Labor Cost Variance Analysis

January 31, 2018 | Author: api-27014089 | Category: Ton, Labour Economics, Economics, Business, Economies
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Lesson-27 Labor Cost Variance Analysis Learning Objectives • • • •

To learn how to calculate labor cost variance To learn how to calculate labor efficiency variance To learn how to calculate labor rate variance To learn how to calculate overhead variance

Terminology 1. SH 2. SR 3. AH 4. AR 5. RSH 6. LCV 7. LRV 8. LEV 9. LMV 10. LITV

= = = = = = = = = =

Standard Hours Standard Rate per hour Actual Hour Actual Rate per hour Revised Standard Hour Labor Cost Variance Labor Rate Variance Labor Efficiency Variance Labor Mix Variance Labor Idle Time Variance

Problem 1 The information regarding composition and weekly wages rates of labor force engaged in a particular job is as follows: Workers

Std. No. of Hours -----------------------------Skilled 75 Semi-skilled 45 Unskilled 60

Std. Rate per hour -----------60 40 30

Actual No. of Hours ---------------70 30 80

Calculate the following: • • •

LCV LRV LEV

Solution 1. Labor Cost Variance (LCV) = Skilled

=

(SH x SR)



(AH x AR)

(75 x 60)



(70 x 70)

Actual Rate per hour ----------------70 50 20

Semi-skilled

=

Unskilled

=

4500



4900

=

400(A)

(45 x 40) 1800 (60 x 30) 1800

– – – –

(30 x 50) 1500 (80 x 20) 1600

= =

300 F

Total LCV 2.

=

200 F -------100 F -------

LRV

=

AH (SR – AR)

Skilled

=

70 (60 – 70)

=

70 x (-10)

=

700(A)

Semi-Skill

=

30 (40 -50)

=

30 x (-10)

=

300(A)

Unskilled

=

80 (30-20)

=

80 x (-10)

=

8000(F) -------200 A ---------

Total LRV 3.

=

=

LEV

=

SR (SH AH)

Skilled

=

60 (75-70)

=

60 x 5

=

300 F

Semi-skilled =

40 (45-30)

=

40 x 15

=

600 F

Unskilled

30 (60-80)

=

30 x (-20)

=

600 A --------300 (F) ---------

=

LEV

=

Verification LCV 100 (F) 100 (F)

= = =

LRV + LEV 200 (A) + 300 (F) 100 (F)

Problem 2 The budgeted labor force for producing 1000 articles is as follows: Particulars ------------30 men @ Rs. 40 per hour For 50 hours

Total Std. Hours -----------------1500

Total Std. Cost ------------------600

20 women @ Rs. 30 per hour For 30 hours

1800

200 ----2300 ------

40 ---820 -----

10 boys @ Rs. 20 per hour For 20 hours

600

The actual data for producing 1000 articles is as follows: 25 men @ 45 per hour for 50 hours

1250

562.50

30 women @ 30 per hour for 30 hours

900

270.00

10 boys @ 30 per hour for 15 hours

150 -----2300 ------

30.00 -------86250 --------

Calculate the following: • • • •

LCV LRV LEV LMV

Solution 1.

LCV

=

SH x SR



AH x AR

Men

=

1500 x 40



1250 x 45

=

3750 F

Women

=

600 x 30



900 x 30

=

9000 A

Boys

=

200 x 20



150 x 20

=

1000 F ---------4250 (A) ----------

Total 2.

=

LRV

=

(SR – AR) AH

Men

=

(40 – 45) 1250

=

6250 A

Women

=

(30 – 30) 900

=

Nil

Boys

=

(20-20) 150

=

nil

Total 3.

=

LEV

=

(SH – AH) SR

Men Women Boys

= = =

(1500 – 1250) 40 (600 – 900) 30 (200 –150) 20

= = =

Total 4.

LMV

= =

---------6250 (A) ----------1000 (F) 900 (A) 100 F ---------6250 (A) -----------

(RSH –AH) SR

Note The revised standard proportions are same as standard hour because the actual total hours are equal to the total standard hours. Hence, there is no mix variance. Problem 3 The standard labor hours and the rate for production of an article are as follows: Particulars

Hour

Rate per hour

Total

Skilled

5

15.00

75.00

Unskilled

8

5

40.000

4 ----17 ------

7.50

30.00 -------145.00 ---------

Semi-skilled

The actual data for 1000 units is as follows: Skilled

4500

20.00

90.00

Unskilled

10,000

4.50

45.000

Semi-skilled

4200 -------18.700 ---------

7.50

31.500 -------1,66,500 -----------

Calculate the following: •

LCV

• • •

LRV LEV LMV

Solution 1.

2.

3.

4.

LCV Skilled

= =

(SH x SR) – (AH x AR) 500 x 15 - 4500 x 20 = 75000 – 90000 = 15,000 (A)

Unskilled

=

(8,000 x 5) – (10.000 x 45) = 40,000 – 45.000 = 5000 (A)

Semi-skilled =

(4,000 x 750)

=

31,500 =

1500 (A) -------21,500 --------

LRV

=

(SR – AR) AH

Skilled

=

(15-20) 4500

=

Unskilled

=

(750-750) 4200

=

Semi-skilled

=

(50- 450) 1000

=

LEV

=

(SH – AH) SR

Skilled

=

(5000-5500)

15

=

7500 (A)

Unskilled

=

(8000-8800)

5

=

4000 (A)

Semi-skilled

=

(4000- 4400) 75

=

300 (A) -------22.000 (A) -----------

22,500 (A) Nil 500 (F) -------22.000 (A) -----------

LMV For calculating labor variance mix, one has to calculate revised standard mix because standard labor and total actual labor are different. LMV

=

(RSH – AH) SR

RSH Skilled

=

5000 ------- X 18700 17000

=

5500

Unskilled

=

Semi-skilled

=

8000 ------ X 18700 17000 4000 ------ X 18700 17000

=

8800

=

4400

LMV Skilled

=

(5500– 4500) 15

=

15000 (F)

Unskilled

=

(10.000– 8800) 5

=

6000 (A)

Semi-skilled

=

(4400– 4200) 7.5

=

1500 (G) -----------10500 (F) ------------

Working Notes The calculation of standard hours for actual products is as follows: For 1 unit

=

5 hours

Skilled

=

1000 units x 5 hours

=

5000 hours

Unskilled

=

1000 units x 8 hours

=

8000 hours

Semi-skilled

=

1000 units x 4 hours

=

4000 hours --------------17,000 hours ---------------

Overhead Variance Problem Calculate the following overhead variances: Particulars

Budget

Actual

Output in units

12.000

14.000

No. of working days 20

22

Fixed overheads

36.000

49.000

Variable overheads

24.000

35.000

There was an increase of 5% in capacity. Solution First, calculate the standard fixed overhead rate per unit as follows: Standard fixed overhead rate =

36.000 -------12.000 units 24100 --------12.000

Standard variable overhead rate = 1.

Total overhead cost variance

=

3 per unit

=

2 per unit

=

(Actual output x 9 standard rate) – Actual overhead 14000 x (3+2) 2.



(49.000+35…)

70.000 - 84.000 = 14000(A) Variable overheads variance = (Actual output x standard variable overhead rate) – (Actual variance overhead) = 14000 x 2– 35.000 = 28000-35.000 = 7000(A)

3.

Fixed overhead variance (Actual output x standard fixed overhead rate) = Actual overhead 14000 x 3 – 49.000 = 42.00 = 7000(A)

4.

Expenditure variance =

5.

6.

Volume variance

Capacity variance

(Budget fixed overhead) – (Actual fixed overhead)

=

36.000 – 49.000 = 13000(A)

=

Actual output x standard rate–budgeted fixed overhead rate

=

(14000 x 3) – (36.000)

=

42.000 – 36.000

=

Standard rate (revised budget units – budget units)

=

Budgeted units for 20 days = 12.000 Budgeted units for 22 days = 12.000 x 22 --------------- = 20

13.200

6.000(F)

Revised budget units =

7.

=

13.200 + (13,200 + 5) (After an increase of 5% capacity) ------------------------------------------------100 13.200 + 660 = 13.860

Capacity variance

=

3(13860 – 13200)

Calendar variance

=

Change in number of units by change in actual and standard number of days x standard rate

=

1980 (F)

Change in number of days = 2 Increase in units in 2 days = 12.000 x 2 -----------20 Calendar variance = 1200 x 3 8.

Efficiency variance

= = = =

= 1200 =

3600 (F)

Standard rate (actual quantity – revised budgeted units) 3 (14.000 – 13.860) 3 (140) 420 (F)

Exercise 1. The standard cost of a chemical mixture is as follows: • • •

8 tons of material A at Rs.40 per ton 12 tons of material B at Rs. 60 per ton Standard yield is 90% of input

The actual cost for a period is as follows: • • •

10 tons of material A at Rs. 30 per ton 20 tons of material B at Rs. 68 per ton Actual yield is 26.5 tons

Compute the variances of all materials. 2. The standard material cost of 100 kgs of chemical D is as follows: • • •

Chemical a A-- 30 kgs @ Rs. 4 per kg Chemical a B-- 40 kgs @ Rs. 5 per kg Chemical a C-- 80 kgs @ Rs. 6 per kg

In a batch, 500 kgs of chemical D was produced from a mix of the following:

• • •

Chemical a A-- 140 kgs at a cost of Rs. 588 Chemical a B-- 220 kgs at a cost of Rs. 1,056 Chemical a C-- 440 kgs at a cost of Rs. 2,860

Calculate all variances. 3. AB Ltd. has established the following standard mix for producing nine gallons of product A: Rs. 5 gallons of material X at Rs. 7 per gallon = 35 3 gallons of material Y at Rs. 5 per gallon = 15 2 gallons of material Z at Rs. 2 per gallon = 4 ------54 A standard loss of 10% of input is expected to occur. The actual input was as follows: • • • •

53,000 gallons of material X at Rs. 7 per gallon 28,000 gallons of material Y at Rs. 5.30 per gallon 19,000 gallons of material Z at Rs. 2.20 per gallon The actual output for a period was 92,700 gallons of product A

Compute all material variances. 4. A gang of workers usually consists of 10 men, 5 women and 5 boys in a factory. They are paid at standard hourly rates of Rs. 1.25, Re. 0.80 and Re. 0.70 respectively. In a normal working week of 40 hours, the gang is expected to produce 1,000 units of output. In a certain week, the gang consisted of 13 men, 4 women and 3 boys. The actual wages were paid at the rates of Rs.1.20, 0.85 and Re. 0.65 respectively. Two hours per week were lost due to abnormal idle time and 960 units of output were produced. Calculate the various labor variances. 5. A factory operates a system of standard costs for a given four-week period budgeted for production of 2,000 units. The actual production was 1,800 units. The costs relating to that period were as follows:

Fixed overheads Variable overhead Semi-variable overheads

Standard (Rs.) 80,000 40,000 15,000

Actual (Rs.) 74,000 38,000 14,700

Semi-variable overheads are 60% fixed and 40% variable. Prepare a variance statement to be presented before the management.

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