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Labour Time Variance is an important concept of standard costing and variance analysis used in Accounting for Managerial Decisions. It measures the difference between the standard labour hours allowed for the actual output and the actual hours worked, valued at the standard rate of labour. It helps management determine whether labour has been used efficiently and whether the actual time spent on production is more or less than the time that should have been required according to predetermined standards. Standard costing involves establishing standards for labour, material, overheads and other costs before production takes place. After actual production, the actual costs and performance are compared with these standards. The differences between standard and actual performance are known as variances. Labour variances are particularly useful because labour is often a significant component of total production cost. Labour Time Variance focuses specifically on the efficiency with which labour time has been utilized. Labour Time Variance can be expressed as: Labour Time Variance = (Standard Hours for Actual Output − Actual Hours Worked) × Standard Labour Rate Here, standard hours for actual output mean the number of labour hours that should have been used to produce the actual quantity of output. Actual hours worked refer to the actual number of hours spent by workers in producing that output. The standard labour rate is the predetermined hourly wage rate. If standard hours are greater than actual hours, the variance is favourable because the actual output has been produced in less time than expected. If actual hours are greater than standard hours, the variance is adverse or unfavourable because more labour time has been used than the standard requirement. For example, suppose a company has established a standard of 5 labour hours for producing one unit of a product. During a particular period, 1,000 units are produced. Therefore, the standard hours for actual output are 5,000 hours. ____ __________ ______ ________ _____ ______ ___.
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