Labour and material variances – Level 4 study tips

Labour

The Labour Rate Variance (LRV) compares how much the actual hours worked in a time period actually cost with how much they would have cost using the standard cost per labour hour. As with all variances at this level, the LRV will be given a numerical value and a descriptor. The descriptor is either adverse or favourable.

• Adverse: The actual cost for hours worked was more than standard cost for actual hours
• Favourable: The actual cost for hours worked was less than standard cost for actual hours

The table below gives some suggested causes for Labour Rate Variances. The causes in the table are generic and designed to give an overall understanding, they may not be applicable to a given scenario or real world situation. Students should only apply possible causes for variances if they are relevant to any given scenario.

Labour Efficiency Variance (LEV)

The LEV compares how long the actual output produced took, compared to the standard duration (actual output x standard hours per unit).  As with all variances at this level the LEV will be given a numerical value and a descriptor. The descriptor is either adverse or favourable.

• Adverse: The actual production took longer than standard
• Favourable: The actual production took less time than standard

The table below gives some suggested causes for LEV.

Total labour variance and how the sub variances can be connected.

The total labour variance for a period is caused by a combination of the LRV and the LEV. The LRV and LEV can be connected; examples of this include but are not limited to:

– A more efficient workforce (Favourable LEV) may in turn cost more per hour in wages (Adverse LRV)

– A less efficient workforce (Adverse LEV) may be on a lower wage than budgeted (Favourable LRV)

– Lower grade staff could be introduced to the workforce alongside a new, easier production process which improves    efficiency (Favourable LRV and LEV)

Staff could receive a pay increase but also struggle to get to grips with a new production process (Adverse LRD and LEV)All variances would be analysed and investigated where necessary. You may find that one of the sub-variances (LRV or LEV) has a greater impact on the overall labour variance than the other.

Material Price Variance (MPV)

The MPV compares how much the actual materials used in a time period actually cost with how much they would have cost using the standard cost per unit of material (can be metres/litres/tonnes etc). As with all variances at this level the MPV will be given a numerical value and a descriptor. The descriptor is either adverse or favourable.

• Adverse: The actual cost for materials used was more than standard cost for the actual usage
• Favourable: The actual cost for materials used was less than standard cost for the actual usage

The table below gives some suggested causes for Material Price Variance.

Material Usage Variance (MUV)

The MUV compares how much material was used making the actual output compared to the standard usage for the actual output. As with all variances at this level the MUV will be given a numerical value and a descriptor. The descriptor is either adverse or favourable.

• Adverse: The actual production used more material than standard
• Favourable:  The actual production used less material than standard

The table below gives some suggested causes for MUV.

Total material variance and how the sub variances can be connected. The total material variance for a period is caused by a combination of the MPV and the MUV (MPV + MUV = Total material variance).

The MPV and MUV can be connected; examples of this include but are not limited to:

– A more expensive material (Adverse MPV) may be superior and reduce wastage (Favourable MUV)

– A cheaper material (Favourable MPV) may be inferior and increase wastage (Adverse MUV)

– Raw material may be in shortage worldwide increasing prices, this raw material may in turn be inferior in quality and    increase wastage (Adverse MPV and MUV)

– A new supplier could be found offering a superior raw material (reducing waste) at a cheaper price (Favourable MPV   and MUV)

All variances would be analysed and investigated where necessary.  You may find that one of the sub-variances (MPV or MUV) has a greater impact on the overall material variance than the other.

What happens next?

The labour and material variances can now be added and used to reconcile the budgeted costs of production with the actual costs. A management accountant may be required to report on the variance analysis findings.  The recipient of said report could be internal within an organisation (the management) or external (to a client). The report could give suggestions as to the most significant variances, the causes of these variances and how to proceed and improve on the current figures.

A theoretical situation could be that a client is facing a massive adverse labour variance but a favourable material variance. Investigation indicates that the workforce is a higher grade than initially budgeted for but the workforce is more skilled and is using up less material.  It would be the management accountant who would analyse this and communicate the findings to the client/management.

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Mathew Pickering is an AAT lecturer at The Sheffield College, part of the team which won Training Provider of the year (medium size provider) in 2015.