Direct Labor Idle Time Variance
Labor Idle Time Variance is the cost of the standby time of direct labor which could not be utilized in the production due to reasons including mechanical failure of equipment, industrial disputes and lack of orders.
Idle Time Variance: = Number of idle hours x Standard labor rate
Idle time variance illustrates the adverse impact on the profitability of an organization as a result of having paid for the labor time which did not result in any production. Idle time variance is therefore always described as an 'adverse' variance.
The separate calculation of idle time variance ensures a more meaningful analysis of the underlying productivity of the workforce demonstrated in the labor efficiency variance as illustrated in the example below.
As with the labor efficiency variance, the calculation of idle time variance is based on the standard rate since the variance between actual and standard labor rate is separately accounted for in the labor rate variance.
DM is a denim brand specializing in the manufacture and sale of hand-stitched jeans trousers.
DM manufactured and sold 10,000 pairs of jeans during a period.
Information relating to the direct labor cost and production time per unit is as follows:
During the period, 800 hours of idle time was incurred. In order to motivate and retain experienced workers, DM has devised a policy of paying workers the full hourly rate in case of any idle time.
Note: 0.65 hours per unit of actual time includes the idle time.
Calculation of idle time variance and labor efficiency variance will be as follows:
(a) Idle Time Variance:
Idle time variance = number of idle hours x standard rate
= 800 hours x $10
= $8,000 Adverse.
(b) Labor Efficiency Variance:
Step 1: Calculate the total number of hours
Total Hours = 10,000 units x 0.65 hours per unit
= 65,000 hours.
Step 2: Calculate the number of active hours
Active Hours = 6,500 hours (Step 1) - 800 idle hours
= 5,700 hours.
Step 3: Calculate the standard cost of active hours
Standard Cost = Active Hours x Standard Rate
of Active Hours
= 5,700 hours (Step 2) x $10 per hour
Step 4: Calculate the standard hours
Standard Hours = 10,000 units x 0.60 hours per unit
= 6,000 hours.
Step 5: Calculate the standard cost
Standard Cost = Standard Hours x Standard Rate
= 6,000 hours (Step 3) x $10 per hour
Step 6: Calculate the variance
Labor Efficiency Variance = Standard Cost of Active Hours - Standard Cost
= $57,000 (Step 3) - $60,000 (Step 5)
= $3,000 Favorable
Step 7: Perform check
The sum of idle time variance and labor efficiency variance calculated above should equal the labor efficiency variance ignoring idle time.
Sum of variances = Idle time variance + Labor efficiency variance
= $8,000 Adverse + ($3,000 Favorable)
= $5,000 Adverse
Labor efficiency variance = Standard Cost of Actual Hours - Standard Cost
(without idle time variance)
= 6,500 Hours (Step 1) x $10 - $60,000 (Step 5)
= $5,000 Adverse
Without considering the impact of idle time, it would appear that the productivity of workforce (1.53 units per hour*) had been lower than the standard (1.67 units per hour**) due to inefficient workflow and production process. However, taking into consideration the unavoidable production time lost (idle time), we can conclude that the underlying efficiency of the workforce improved (1.75 units per hour***) compared with the standard.
* 10,000 units / 6,500 hours (total)
** 10,000 units / 6,000 hours (standard)
*** 10,000 units / 5,700 hours (active)
Reasons for idle time may include:
- Disruption of production activities due to mechanical failures
- Lack of purchase orders especially in case of seasonal businesses
- Industrial disputes