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Cost Accounting · Standard Costing and Variance Analysis

Labour Cost Variances: Formulas and Numericals

Updated 10 October 2026 · Fact-checked

Labour cost variance is the standard labour cost of actual output minus the actual labour cost. You split it into rate variance (price paid per hour), efficiency variance (hours worked versus standard hours) and idle time variance (paid but unworked hours). Mix and yield variances then split efficiency further.

Understand Labour Cost Variances

A labour cost variance compares what labour should have cost for the output achieved with what it actually cost. A positive result is favourable (F) because actual cost was lower. A negative result is adverse (A) because actual cost was higher.

There are only two ideas behind every formula: rate and hours. Rate asks whether you paid more or less per hour than standard. Hours asks whether the work took more or fewer hours than standard allowed for the output.

Hours has two parts. Workers are paid for all hours on the clock, but some hours are lost to power failure, machine breakdown or waiting for material. These are idle hours. They earn wages but produce nothing. So you separate the idle time variance from the efficiency variance, which looks only at hours actually worked.

When two or more grades of labour work together, efficiency splits again. The mix variance shows the effect of using grades in a different proportion from standard. The yield variance (also called sub-efficiency) shows the effect of getting more or less output from the total hours than standard expects.

The key anchor is standard hours for actual output: the hours that should have been taken to make what was actually produced. Every variance starts from it, not from budgeted output.

Key rules to remember

Standard hours for actual output (SH)
SH = Actual output × Standard hours per unit
Use actual output, not budgeted output. For several grades, work out SH for each grade.
Labour cost variance (LCV)
LCV = (SH × SR) − (Actual hours paid × AR)
Standard cost of actual output minus actual wages. Positive is F, negative is A.
Labour rate variance
(SR − AR) × Actual hours paid
Use hours paid, not hours worked, because the rate applies to every hour paid.
Labour efficiency variance
(SH − Actual hours worked) × SR
Actual hours worked = hours paid − idle hours. Valued at standard rate.
Idle time variance
Idle hours × SR
Always adverse, because idle hours produce nothing.
Check relationship
LCV = Rate variance + Efficiency variance + Idle time variance
Use this to verify your answer before moving on.
Labour mix variance
(Revised standard hours − Actual hours worked) × SR, grade by grade
Revised standard hours = total actual hours worked × standard proportion of that grade. Also equals standard cost of standard mix minus standard cost of actual mix.
Labour yield variance
(SH − Revised standard hours) × SR, grade by grade
Total can also be worked as (SH total − total actual hours worked) × standard average rate per hour.
Efficiency split
Efficiency variance = Mix variance + Yield variance
Applies when idle time is shown separately and mix and yield use hours worked.

How to solve Labour Cost Variances questions

Use the same layout for every labour variance question. Work grade by grade first, then total.

  1. 1Read the data and list standard hours per unit, standard rate, actual output, hours paid, idle hours and actual rate or actual wages.
  2. 2Calculate actual hours worked = hours paid − idle hours.
  3. 3Calculate standard hours for actual output = actual output × standard hours per unit (for each grade).
  4. 4Compute the standard cost (SH × SR) and the actual cost (hours paid × AR). The difference is the labour cost variance.
  5. 5Compute rate, idle time and efficiency variances. Mark each F or A.
  6. 6If grades are involved, compute the revised standard hours. Then work out mix and yield variances for each grade.
  7. 7Check that rate + idle time + efficiency equals the cost variance, and mix + yield equals efficiency.
  8. 8Write one line of interpretation for each major variance, naming a likely cause.

Quickest way: Three-column hours table

When to use it: Use it when the question gives hours and rates for one or more grades and you have little time.

  1. Draw three columns: standard hours for actual output (SH), actual hours worked (AHW) and actual hours paid (AHP).
  2. Write SR and AR beside each grade.
  3. Efficiency = (SH − AHW) × SR. Idle time = (AHP − AHW) × SR. Rate = (SR − AR) × AHP.
  4. Add the three to get the cost variance, then confirm it against SH × SR − AHP × AR.
  5. For mix, insert one more column: total AHW spread in the standard ratio. Mix = (that column − AHW) × SR. Yield = (SH − that column) × SR.

Common mistakes in Labour Cost Variances

  • Calculating the rate variance on hours worked instead of hours paid

    Students copy the efficiency variance habit of using hours worked.

    Fix: Remember that you pay for every hour on the clock. Rate variance always uses hours paid.

  • Using budgeted output to get standard hours

    The question gives both budgeted and actual output, and the first is picked up.

    Fix: Underline actual output and use only that for SH.

  • Valuing idle time at actual rate

    The idle cost feels like an actual payment.

    Fix: Idle time variance = idle hours × standard rate. The rate difference on idle hours is already in the rate variance.

  • Showing idle time as favourable or leaving it inside efficiency

    Students ignore the detail that hours paid exceed hours worked.

    Fix: Always check whether idle hours are given. If yes, deduct them to get hours worked and show idle time as a separate adverse variance.

  • Mixing up the revised standard hours for mix and yield

    Students apply the standard ratio to standard hours instead of actual total hours.

    Fix: Revised standard hours = total actual hours worked × standard ratio. SH is a different column.

  • Writing signs without F or A, or getting the sign wrong

    Subtraction order is reversed under time pressure.

    Fix: Ask whether the actual result was better or worse for profit. Fewer hours or lower rate than standard is F; more is A.

Worked examples

Example 1

Standard: 10 labour hours per unit at ₹40 per hour. Actual output was 500 units. 5,300 hours were paid at ₹42 per hour, i.e. ₹2,22,600. Of these, 200 hours were idle. Calculate the labour cost, rate, efficiency and idle time variances.

Show the solution
  1. Standard hours for actual output = 500 × 10 = 5,000 hours.
  2. Actual hours worked = 5,300 − 200 = 5,100 hours.
  3. Standard cost = 5,000 × ₹40 = ₹2,00,000. Actual cost = 5,300 × ₹42 = ₹2,22,600.
  4. Labour cost variance = ₹2,00,000 − ₹2,22,600 = ₹22,600 A.
  5. Rate variance = (₹40 − ₹42) × 5,300 = ₹10,600 A.
  6. Efficiency variance = (5,000 − 5,100) × ₹40 = ₹4,000 A.
  7. Idle time variance = 200 × ₹40 = ₹8,000 A.
  8. Check: 10,600 + 4,000 + 8,000 = ₹22,600 A.

Answer: Labour cost variance ₹22,600 A; rate ₹10,600 A; efficiency ₹4,000 A; idle time ₹8,000 A. Higher wage rates, slow working and lost hours all raised cost.

Example 2

Standard labour for 80 units of product: Skilled 60 hours at ₹50 per hour; Semi-skilled 40 hours at ₹30 per hour. Actual output was 1,500 units. Actual labour: Skilled 1,300 hours at ₹52 per hour; Semi-skilled 700 hours at ₹28 per hour. There was no idle time. Calculate the cost, rate, efficiency, mix and yield variances.

Show the solution
  1. Batches of standard output = 1,500 ÷ 80 = 18.75. SH: Skilled = 60 × 18.75 = 1,125 hours; Semi-skilled = 40 × 18.75 = 750 hours. Total SH = 1,875.
  2. Standard cost = 1,125 × ₹50 + 750 × ₹30 = ₹56,250 + ₹22,500 = ₹78,750.
  3. Actual cost = 1,300 × ₹52 + 700 × ₹28 = ₹67,600 + ₹19,600 = ₹87,200.
  4. Labour cost variance = ₹78,750 − ₹87,200 = ₹8,450 A.
  5. Rate variance: Skilled (50 − 52) × 1,300 = ₹2,600 A; Semi-skilled (30 − 28) × 700 = ₹1,400 F; net ₹1,200 A.
  6. Efficiency variance: Skilled (1,125 − 1,300) × 50 = ₹8,750 A; Semi-skilled (750 − 700) × 30 = ₹1,500 F; net ₹7,250 A.
  7. Revised standard hours: total actual hours 2,000 in ratio 60:40 gives Skilled 1,200 and Semi-skilled 800.
  8. Mix variance: Skilled (1,200 − 1,300) × 50 = ₹5,000 A; Semi-skilled (800 − 700) × 30 = ₹3,000 F; net ₹2,000 A.
  9. Yield variance: Skilled (1,125 − 1,200) × 50 = ₹3,750 A; Semi-skilled (750 − 800) × 30 = ₹1,500 A; net ₹5,250 A.
  10. Checks: 1,200 + 7,250 = ₹8,450 A; 2,000 + 5,250 = ₹7,250 A.

Answer: Labour cost variance ₹8,450 A; rate ₹1,200 A; efficiency ₹7,250 A, made up of mix ₹2,000 A and yield ₹5,250 A. Too many costly skilled hours were used and the total hours gave less output than standard.

Exam tips

  • Show a working note for standard hours, hours worked and revised standard hours. Step marks are given for these even if a later figure is wrong.
  • Always label every variance F or A and add a one-line reason, such as a wage rise, poor supervision or machine breakdown.
  • Write the check line (rate + efficiency + idle = cost variance). It catches errors and shows the examiner you verified.
  • In MCQs, look first for idle hours. If given, the efficiency variance uses hours worked, not hours paid. Wrong options are often built from that slip.
  • Do not mix up efficiency, mix and yield. Mix is about the proportion of grades; yield is about output from total hours.

Practice questions from Standard Costing and Variance Analysis

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 efficiency variance and labour yield variance?

Efficiency variance compares standard hours for actual output with actual hours worked, for all grades together or separately. Yield variance is one part of it. It compares standard hours with revised standard hours, so it shows the effect of output from total hours. The other part is the mix variance.

Is idle time variance always adverse?

Yes. Idle hours are paid but produce nothing, so they only add cost against the standard. The standard normally allows no idle time, unless the question says a normal idle time is built into the standard.

Which hours are used for labour rate variance?

Use the hours paid. The difference between standard and actual rate applies to every hour for which wages were paid, including idle hours.

When do I calculate mix and yield variances for labour?

Calculate them when the question gives standard labour for two or more grades with standard proportions. If only one grade is involved, there is no mix variance, and efficiency is the whole figure.