Definition
The Direct Labour Total Cost Variance is a key performance metric in cost accounting. It measures the difference between the actual cost incurred on direct labour for actual production and the standard cost that was budgeted for the labour. By doing so, it provides useful insights into labour management efficiency and cost control within an organization.
The formula for calculating the Direct Labour Total Cost Variance is:
\[ \text{Direct Labour Total Cost Variance} = (\text{Actual Hours} \times \text{Actual Rate}) - (\text{Standard Hours} \times \text{Standard Rate}) \]
This variance can be further broken down into two main components:
- Direct Labour Rate of Pay Variance: This reflects the variance due to the differences between the actual rate paid and the standard rate.
- Direct Labour Efficiency Variance: This reflects the variance due to the differences between the actual hours worked and the standard hours expected for the output achieved.
Examples
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Example 1:
- Actual Hours = 1,500 hours
- Actual Rate = $15 per hour
- Standard Hours = 1,600 hours
- Standard Rate = $14 per hour
Calculation: \[ \text{Direct Labour Total Cost Variance} = (1,500 \times 15) - (1,600 \times 14) = 22,500 - 22,400 = $100 \text{ (Unfavorable)} \] The result shows an unfavorable variance of $100, indicating actual costs were higher than standard costs.
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Example 2:
- Actual Hours = 2,000 hours
- Actual Rate = $10 per hour
- Standard Hours = 2,100 hours
- Standard Rate = $11 per hour
Calculation: \[ \text{Direct Labour Total Cost Variance} = (2,000 \times 10) - (2,100 \times 11) = 20,000 - 23,100 = -$3,100 \text{ (Favorable)} \] The result shows a favorable variance of $3,100, indicating actual costs were lower than standard costs.
Frequently Asked Questions
What causes Direct Labour Total Cost Variance?
Several factors can cause Direct Labour Total Cost Variance, including changes in wage rates, labor efficiency, overtime incurred, and unexpected changes in production schedules.
How can Direct Labour Total Cost Variance be improved?
Improving labour efficiency, negotiating better wage rates, proper scheduling, and employee training are some ways to improve the variance results.
Is a positive Direct Labour Total Cost Variance good?
Not necessarily. A “positive” variance (favorable) indicates costs were lower than expected, but this could also mean underutilization of resources or potential quality issues in production.
How often should the Direct Labour Total Cost Variance be calculated?
This typically depends on the organization’s policies but can be calculated monthly, quarterly, or annually to monitor and control labour costs effectively.
What is the significance of Direct Labour Total Cost Variance in cost management?
Identifying discrepancies through this variance helps in pinpointing areas for cost control and efficiency improvements, ultimately aiding in better budget management.
Related Terms
- Direct Labour Rate of Pay Variance: This measures the difference between the actual hourly wage rate and the standard hourly wage rate.
- Direct Labour Efficiency Variance: This measures the difference between the actual hours worked and the standard hours that should have been worked for the output achieved.
Online References
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- A comprehensive guide on cost accounting practices and principles.
- “Management and Cost Accounting” by Colin Drury
- This book provides a thorough understanding of cost accounting with contemporary examples.
- “Introduction to Management Accounting” by Charles T. Horngren and Gary L. Sundem
- An introductory text that delves into basic accounting principles and cost variance analysis.
Accounting Basics: “Direct Labour Total Cost Variance” Fundamentals Quiz
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