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Management Accounting · Standard Costing and Variance Analysis (Management Accounting)

Labour Cost Variances: Formulas and Numericals

Updated 10 October 2026 · Fact-checked

Labour cost variance is the difference between the standard labour cost for actual output and the actual labour cost. You split it into rate variance (price paid per hour), idle time variance (paid but unworked hours) and efficiency variance (hours worked against standard). Efficiency further splits into mix and yield variances.

Understand Labour Cost Variances

A labour cost variance compares what labour should have cost for the output you actually made with what it really cost. If actual cost is higher, the variance is adverse (A). If it is lower, it is favourable (F).

The total variance is not enough for control, so you break it into causes. Two things can go wrong with labour: you pay a different rate per hour, or you use a different number of hours. Rate variance covers the first. The hours problem splits again: some hours were paid but nothing was produced (idle time), and the hours actually worked may be more or fewer than the standard allows (efficiency).

When the job uses more than one grade of labour, efficiency can be split once more. Mix variance shows the effect of using grades in a different proportion from the standard. Yield variance shows the effect of getting more or less output from the total hours worked. Mix plus yield equals the efficiency variance.

The key to every number is the base. Rate and idle time work on hours paid and idle hours. Efficiency, mix and yield work on hours worked. Standard hours are always for the actual output, not the budgeted output.

Key rules to remember

Labour Cost Variance (LCV)
LCV = (Standard hours for actual output × SR) − (Actual hours paid × AR)
Positive means favourable, negative means adverse. SR = standard rate, AR = actual rate.
Labour Rate Variance (LRV)
LRV = Actual hours paid × (SR − AR)
Use hours paid, which includes idle hours.
Labour Efficiency Variance (LEV)
LEV = SR × (Standard hours for actual output − Actual hours worked)
Use hours worked, which excludes idle hours.
Idle Time Variance (LITV)
LITV = Idle hours × SR
Adverse whenever idle hours exist, because paid hours produced nothing. If there is no idle time, the variance is nil.
Total check
LCV = LRV + LEV + LITV
Use this to verify your answer before moving on.
Labour Mix Variance (LMV)
LMV = SR × (Revised standard hours − Actual hours worked), grade by grade
Revised standard hours = total actual hours worked shared in the standard mix ratio.
Labour Yield (Sub-efficiency) Variance
LYV = SR × (Standard hours for actual output − Revised standard hours), grade by grade
Equals the standard average cost per hour × (standard hours for actual output − total actual hours worked).
Mix and yield link
LEV = LMV + LYV
Holds on hours worked, after removing idle time.

How to solve Labour Cost Variances questions

Use the same tabular method for every labour variance question. It keeps grades separate and makes the check automatic.

  1. 1Write the standard data per unit or per batch: hours and rate for each grade of labour.
  2. 2Compute standard hours for actual output: standard hours per unit × actual units, grade by grade.
  3. 3List actual hours paid, idle hours, hours worked (paid minus idle) and actual rate for each grade.
  4. 4Compute LCV first: standard cost for actual output minus actual cost.
  5. 5Compute rate variance on hours paid, idle time variance on idle hours, and efficiency variance on hours worked. Mark each F or A.
  6. 6If mix and yield are asked, find revised standard hours using actual total hours worked in the standard ratio. Then compute mix and yield for each grade and in total.
  7. 7Verify: LRV + LITV + LEV = LCV, and LMV + LYV = LEV. Write one line of interpretation for each major variance.

Quickest way: Four-column hours-and-cost grid

When to use it: Use when the question gives several grades of labour or asks for mix and yield, and time is short.

  1. Draw columns: standard hours for actual output, revised standard hours, actual hours worked, actual hours paid.
  2. Fill the rows for each grade, then total them.
  3. Multiply each hours column by the standard rate to get cost. Variances are differences between adjacent columns.
  4. Differences between standard hours and revised standard hours give yield, and between revised standard hours and hours worked give mix.
  5. Only the rate variance needs the actual rate, so calculate it last as hours paid × (SR − AR).

Common mistakes in Labour Cost Variances

  • Using hours worked for the rate variance.

    Students copy the efficiency base for every variance.

    Fix: Rate variance uses hours paid, because you pay for idle hours too. Efficiency uses hours worked.

  • Showing idle time variance as favourable.

    The sign is taken from the formula without thinking about the meaning.

    Fix: Paid hours with no output are a loss, so idle time variance is adverse whenever idle hours exist. If there is no idle time, it is nil.

  • Using budgeted output to find standard hours.

    The budget figure is the first one in the question.

    Fix: Flex to actual output: standard hours per unit × actual units produced.

  • Calculating revised standard hours from hours paid instead of hours worked.

    Idle time is ignored when the total hours are added up.

    Fix: Revised standard hours use total actual hours worked, so subtract idle hours first.

  • Reversing the order in mix and yield, so the signs are wrong.

    Students remember formulas by words, not by direction.

    Fix: Mix = SR × (revised standard hours − actual hours). Yield = SR × (standard hours − revised standard hours). Then check that they add up to efficiency.

  • Skipping the total check.

    There is time pressure and each variance looks reasonable.

    Fix: Always confirm LRV + LITV + LEV = LCV. It takes ten seconds and catches most errors.

Worked examples

Example 1

Standard: 8 labour hours per unit at ₹50 per hour. Actual output 1,000 units. Actual hours paid 8,400 at ₹52 per hour, of which 200 hours were idle. Calculate labour cost, rate, idle time and efficiency variances.

Show the solution
  1. Standard hours for actual output = 1,000 × 8 = 8,000 hours.
  2. Standard cost = 8,000 × ₹50 = ₹4,00,000. Actual cost = 8,400 × ₹52 = ₹4,36,800.
  3. LCV = ₹4,00,000 − ₹4,36,800 = ₹36,800 (A).
  4. LRV = 8,400 × (₹50 − ₹52) = ₹16,800 (A).
  5. Idle time variance = 200 × ₹50 = ₹10,000 (A).
  6. Hours worked = 8,400 − 200 = 8,200. LEV = ₹50 × (8,000 − 8,200) = ₹10,000 (A).
  7. Check: 16,800 + 10,000 + 10,000 = ₹36,800 (A).

Answer: LCV ₹36,800 (A); rate variance ₹16,800 (A); idle time variance ₹10,000 (A); efficiency variance ₹10,000 (A).

Example 2

Standard labour for 100 units: Skilled 60 hours at ₹50 and Unskilled 40 hours at ₹30. Actual output 1,800 units. Actual: Skilled 1,000 hours at ₹52; Unskilled 900 hours at ₹28. There is no idle time. Calculate cost, rate, efficiency, mix and yield variances.

Show the solution
  1. Standard hours for 1,800 units: Skilled 1,080; Unskilled 720; total 1,800.
  2. Standard cost = 1,080 × 50 + 720 × 30 = 54,000 + 21,600 = ₹75,600.
  3. Actual cost = 1,000 × 52 + 900 × 28 = 52,000 + 25,200 = ₹77,200. LCV = ₹1,600 (A).
  4. Rate: Skilled 1,000 × (50 − 52) = ₹2,000 (A); Unskilled 900 × (30 − 28) = ₹1,800 (F). Total ₹200 (A).
  5. Efficiency: Skilled 50 × (1,080 − 1,000) = ₹4,000 (F); Unskilled 30 × (720 − 900) = ₹5,400 (A). Total ₹1,400 (A).
  6. Revised standard hours: total actual hours 1,900 in the 60:40 ratio. Skilled 1,140; Unskilled 760.
  7. Mix: Skilled 50 × (1,140 − 1,000) = ₹7,000 (F); Unskilled 30 × (760 − 900) = ₹4,200 (A). Total ₹2,800 (F).
  8. Yield: Skilled 50 × (1,080 − 1,140) = ₹3,000 (A); Unskilled 30 × (720 − 760) = ₹1,200 (A). Total ₹4,200 (A).
  9. Checks: 200 + 1,400 = ₹1,600 (A). Mix 2,800 (F) + yield 4,200 (A) = ₹1,400 (A), which equals efficiency.

Answer: LCV ₹1,600 (A); rate ₹200 (A); efficiency ₹1,400 (A); mix ₹2,800 (F); yield ₹4,200 (A).

Exam tips

  • Set out a neat table for each grade of labour. Step marks go for correct working even if one figure is wrong.
  • Always label every variance F or A. A correct figure without the label often loses marks.
  • State the verification line, such as rate + idle time + efficiency = cost variance, at the end of the answer.
  • Add one sentence of interpretation for the largest variances, for example that the adverse mix may come from using more of the costlier grade.
  • In MCQs, check whether the question asks for hours paid or hours worked. This one detail decides most answers.

Practice questions from Standard Costing and Variance Analysis (Management Accounting)

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 from the standard, on hours paid. Efficiency variance measures the effect of using more or fewer hours than the standard allows for the actual output, at standard rate, on hours worked.

Why is idle time variance always adverse?

Idle hours are paid for but produce nothing. Their standard cost is a pure loss, so the variance is adverse whenever idle hours exist. If no idle time is recorded, the variance is nil, not favourable. This holds for abnormal idle time questions too, where it is still adverse.

How do I find revised standard hours for the mix variance?

Take the total actual hours worked and share it among the grades in the standard ratio. Then compare each grade's revised hours with its actual hours worked, at standard rate.

Do mix and yield variances always add up to the efficiency variance?

Yes, when both are calculated on hours worked at standard rates, after idle time is removed. Use this as a check on your working.