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Cost and Management Accounting · Standard Costing

Labour Cost Variances in Standard Costing

Updated 4 October 2026 · Fact-checked

Labour cost variances compare the standard labour cost of actual output with the actual labour cost paid. Split the total into rate (price paid per hour), idle time (paid but not worked) and efficiency (hours used versus allowed). With a crew mix, split efficiency into mix and yield. Mark each as favourable or adverse.

Understand Labour Cost Variances

A labour cost variance is the gap between what labour should have cost for the output you actually made and what you actually paid. The standard is set in hours per unit and rate per hour. Everything else is a way of explaining the gap.

There are only three basic reasons for a gap. You paid a different rate per hour. You paid for hours when nobody worked (idle time). Or workers took more or fewer hours than allowed for the output (efficiency).

When the job needs more than one grade of worker, efficiency splits again. Mix variance shows the effect of using the grades in a different proportion from the standard. Yield (sub-efficiency) variance shows the effect of total hours being more or less than allowed for the output, valued at standard rates.

A variance is favourable (F) when it increases profit and adverse (A) when it reduces profit. Rate uses hours paid. Efficiency, mix and yield use hours worked. Idle time is the hours paid but not worked.

Normal idle time is already built into the standard hours, so it does not create a variance. Abnormal idle time (strike, power failure, machine breakdown) is shown as a separate variance and written off to the Costing Profit and Loss Account. It is not loaded onto the product cost.

Key rules to remember

Labour Cost Variance (LCV)
LCV = (Standard hours for actual output × Standard rate) − (Actual hours paid × Actual rate)
Positive = favourable, negative = adverse. LCV = Rate + Idle time + Efficiency variance.
Labour Rate Variance (LRV)
LRV = (Standard rate − Actual rate) × Actual hours paid
Use hours paid, which include idle hours.
Labour Efficiency Variance (LEV)
LEV = (Standard hours for actual output − Actual hours worked) × Standard rate
Use hours actually worked, not hours paid.
Idle Time Variance
Idle time variance = Idle hours × Standard rate
Always adverse. Idle hours = hours paid − hours worked. Abnormal idle time goes to Costing P&L.
Standard hours for actual output
SH = Actual output × Standard hours per unit
Calculate this first. It is the base for every variance.
Revised Standard Hours (RSH)
RSH of a grade = Total actual hours worked × (Standard hours of that grade ÷ Total standard hours)
Actual total hours spread in the standard mix.
Labour Mix Variance
Mix = (Revised standard hours − Actual hours worked) × Standard rate, for each grade
Total of mix across grades shows the cost effect of changing the grade proportion.
Labour Yield (Sub-Efficiency) Variance
Yield = (Standard hours for actual output − Revised standard hours) × Standard rate, for each grade
Equals (Total SH − Total actual hours worked) × average standard rate per hour of the standard mix (total standard cost ÷ total standard hours).
Check relationships
Efficiency = Mix + Yield; LCV = Rate + Idle time + Efficiency
Use these to verify your answer before moving on.

How to solve Labour Cost Variances questions

The same method works for single-grade and multi-grade questions. Use a small table so that no hours column is missed.

  1. 1Write down the standard: hours per unit (or per batch) and standard rate for each grade of labour.
  2. 2Find standard hours for actual output: actual output × standard hours per unit, for each grade.
  3. 3List actual hours paid, idle hours, hours worked (paid − idle) and actual rate for each grade.
  4. 4Compute standard cost (SH × SR) and actual cost (hours paid × AR). The difference is LCV.
  5. 5Compute rate variance on hours paid, idle time variance on idle hours, and efficiency variance on hours worked. Label each F or A.
  6. 6If the question has a mix of grades, compute revised standard hours, then mix variance and yield variance. Their total must equal efficiency variance.
  7. 7Check: Rate + Idle + Efficiency = LCV. State clearly whether idle time is normal (ignore it) or abnormal (show separately).

Quickest way: Hours-table method with a sum check

When to use it: Use it for every numerical, especially when you have to attempt MCQs and long answers in 3 hours.

  1. MCQs: first decide if the question uses hours paid or hours worked. Rate variance uses paid. Efficiency, mix and yield use worked.
  2. MCQ trick: a higher actual rate than standard is adverse rate variance. Idle time variance is always adverse. Cut options with the wrong sign first.
  3. MCQ check: if the question gives LCV and two of the three components, subtract to get the third. No need for full working.
  4. Written answers: draw a table with columns SH, RSH, AH worked, AH paid, SR, AR. Fill it once and read every variance off it.
  5. Show the formula with figures for each variance, then the result with F or A. Examiners award step marks even if a number slips.
  6. Finish with a one-line proof, for example: Rate 10,400 A + Idle 8,000 A + Efficiency 8,000 F = LCV 10,400 A.

Common mistakes in Labour Cost Variances

  • Using hours worked for the rate variance

    Students use one hours column for everything.

    Fix: Rate variance is on hours paid. Efficiency is on hours worked. Keep both columns in your table.

  • Including idle time in the efficiency variance

    Idle hours are treated as just extra hours taken.

    Fix: Subtract idle hours from hours paid to get hours worked. Show idle time as its own variance.

  • Using actual rate to value efficiency, mix or yield variances

    Students mix up price and quantity variances.

    Fix: All hour-based variances (efficiency, idle time, mix, yield) use the standard rate. Only the rate variance uses the actual rate.

  • Taking standard hours for the standard output instead of actual output

    Standard data is given per batch, and students use it as is.

    Fix: Scale the standard to actual output first. Standard hours for actual output is the base for flexing.

  • Computing revised standard hours from total standard hours

    The word 'standard' is overread.

    Fix: RSH is total actual hours worked spread in the standard mix ratio. Total RSH must equal total actual hours worked.

  • Loading abnormal idle time onto product cost

    Students forget that idle time cost is a loss.

    Fix: Show abnormal idle time as a separate variance and write it off to the Costing Profit and Loss Account. Normal idle time is already in the standard.

Worked examples

Example 1

Standard: 10 labour hours per unit at ₹40 per hour. In a month, 520 units were produced. Hours paid were 5,200 at ₹42 per hour. Of these, 200 hours were idle because of a power failure (abnormal). Calculate the labour cost, rate, idle time and efficiency variances.

Show the solution
  1. Standard hours for actual output = 520 × 10 = 5,200 hours.
  2. Hours worked = 5,200 paid − 200 idle = 5,000 hours.
  3. Standard cost = 5,200 × ₹40 = ₹2,08,000. Actual cost = 5,200 × ₹42 = ₹2,18,400.
  4. LCV = 2,08,000 − 2,18,400 = ₹10,400 Adverse.
  5. Rate variance = (40 − 42) × 5,200 = ₹10,400 Adverse.
  6. Idle time variance = 200 × ₹40 = ₹8,000 Adverse.
  7. Efficiency variance = (5,200 − 5,000) × ₹40 = ₹8,000 Favourable.
  8. Check: −10,400 − 8,000 + 8,000 = −10,400, which equals LCV.

Answer: LCV ₹10,400 A; Rate ₹10,400 A; Idle time ₹8,000 A (abnormal, written off to Costing P&L); Efficiency ₹8,000 F.

Example 2

Standard labour for 10 units: Skilled 6 hours at ₹50, Semi-skilled 4 hours at ₹30. Actual output was 200 units. Actual hours worked (no idle time): Skilled 140 hours at ₹52; Semi-skilled 80 hours at ₹28. Calculate labour cost, rate, efficiency, mix and yield variances.

Show the solution
  1. Standard hours for actual output: Skilled = 200 ÷ 10 × 6 = 120; Semi-skilled = 200 ÷ 10 × 4 = 80. Total 200.
  2. Standard cost = 120 × 50 + 80 × 30 = 6,000 + 2,400 = ₹8,400.
  3. Actual cost = 140 × 52 + 80 × 28 = 7,280 + 2,240 = ₹9,520.
  4. LCV = 8,400 − 9,520 = ₹1,120 Adverse.
  5. Rate: Skilled (50 − 52) × 140 = 280 A; Semi-skilled (30 − 28) × 80 = 160 F. Net ₹120 A.
  6. Efficiency: Skilled (120 − 140) × 50 = 1,000 A; Semi-skilled (80 − 80) × 30 = 0. Total ₹1,000 A.
  7. Total actual hours = 220. RSH: Skilled = 220 × 6/10 = 132; Semi-skilled = 220 × 4/10 = 88.
  8. Mix: Skilled (132 − 140) × 50 = 400 A; Semi-skilled (88 − 80) × 30 = 240 F. Net ₹160 A.
  9. Yield: Skilled (120 − 132) × 50 = 600 A; Semi-skilled (80 − 88) × 30 = 240 A. Total ₹840 A.
  10. Check: Mix 160 A + Yield 840 A = 1,000 A = Efficiency. Rate 120 A + Efficiency 1,000 A = 1,120 A = LCV.

Answer: LCV ₹1,120 A; Rate ₹120 A; Efficiency ₹1,000 A; Mix ₹160 A; Yield ₹840 A.

Exam tips

  • Draw the hours table first. Most lost marks come from using the wrong hours column, not from wrong arithmetic.
  • Always write F or A next to every figure. A correct number with no label can lose marks.
  • In mix and yield questions, show the RSH working. It is where examiners give step marks, and a total check (Mix + Yield = Efficiency) catches errors.
  • Read the question for the words 'normal' or 'abnormal' idle time. Normal idle time is part of the standard. Abnormal is a separate variance and a P&L loss.
  • For MCQs, work out the sign first. Idle time variance is always adverse, and a rate paid above standard is adverse.

Practice questions from Standard Costing

Labour Cost Variances in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Labour Cost Variances: frequently asked questions

What is the difference between labour rate variance and labour efficiency variance?

Rate variance measures the effect of paying a different rate per hour than standard, on hours paid. Efficiency variance measures the effect of using more or fewer hours than allowed for the actual output, valued at the standard rate and on hours worked.

How do I calculate labour mix variance?

First find revised standard hours by spreading total actual hours worked in the standard ratio of grades. Then for each grade, mix variance = (RSH − actual hours worked) × standard rate. Add across grades and label F or A.

How is labour yield variance different from efficiency variance?

Efficiency variance is the whole effect of hours worked versus standard hours for actual output. Yield variance is the part of it caused by total hours being more or less than allowed. The rest is mix variance, so Efficiency = Mix + Yield.

Is idle time variance always adverse?

Yes. Idle hours are paid for but produce nothing, so the variance is idle hours × standard rate and always reduces profit. Abnormal idle time is shown separately and charged to the Costing Profit and Loss Account.