A to Z Costing Knowledge Glossary — Letter L
Investopedia-style costing concepts explained with formulas, practical examples, comparisons, and exam-focused teaching tips.
1 Labour Cost
| Category | Cost Element |
|---|---|
| Best Used In | Prime cost, product costing, control |
| Key Formula | Labour Cost = Hours Worked × Wage Rate per Hour |
| Exam Importance | Very High |
Labour Cost is the total expenditure incurred on human effort involved in production or service delivery, including wages, salaries, and other benefits.
It is a major element of cost, classified into direct labour (traceable to products) and indirect labour (overhead). Labour cost includes not only basic wages but also bonuses, incentives, and statutory benefits.
- Prime cost calculation
- Job and process costing
- Labour variance analysis and control
A factory calculates direct labour cost by multiplying hours worked by workers on specific jobs with their wage rates. Indirect labour (supervisors) is part of factory overhead.
Worker A worked 40 hours at ₹100/hour on Job 123; direct labour cost = ₹4,000. Supervisor salary ₹30,000/month is indirect labour and included in overheads.
Total Labour Cost = Direct Labour + Indirect Labour
- Identify direct workers and their time on specific jobs.
- Record hours using time tickets or job cards.
- Multiply hours by wage rate for direct labour cost.
- Identify indirect labour costs separately.
- Use for product costing and variance analysis.
| Direct vs. Indirect Labour | Direct labour is traceable to products; indirect labour supports production and is overhead. |
|---|---|
| Labour Cost vs. Labour Rate | Labour cost is total amount; labour rate is per unit of time. |
2 Labour Cost Variance
| Category | Standard Costing / Variance Analysis |
|---|---|
| Best Used In | Labour cost control |
| Key Formula | Labour Cost Variance = Standard Labour Cost − Actual Labour Cost |
| Exam Importance | Very High |
Labour Cost Variance (LCV) is the difference between the standard labour cost allowed for actual production and the actual labour cost incurred.
It is the total variance arising from both wage rate and labour efficiency differences. It can be further analysed into rate and efficiency variances.
- Performance evaluation of labour
- Identifying wage rate or efficiency issues
- Cost control in production
A company sets standard labour cost of ₹50,000 for a production run, but actual labour cost is ₹55,000. LCV = ₹5,000 adverse, prompting investigation into why actual exceeded standard.
Standard labour cost = (Standard hours for actual output 1,000 × Standard rate ₹50) = ₹50,000. Actual labour cost = (1,100 hours × ₹52) = ₹57,200. LCV = 50,000 − 57,200 = ₹7,200 adverse.
- Determine standard labour hours allowed for actual output.
- Compute standard labour cost = standard hours × standard rate.
- Compute actual labour cost = actual hours × actual rate.
- Subtract actual from standard to get LCV.
- Split into rate and efficiency variances for detailed analysis.
| Labour Cost Variance vs. Labour Rate Variance | Rate variance isolates wage rate difference; cost variance includes both rate and efficiency. |
|---|---|
| Labour Cost Variance vs. Labour Efficiency Variance | Efficiency variance isolates hour difference; cost variance is the total. |
3 Labour Efficiency Ratio
| Category | Performance Measurement |
|---|---|
| Best Used In | Measuring labour productivity |
| Key Formula | Labour Efficiency Ratio = (Standard Hours for Actual Output / Actual Hours) × 100 |
| Exam Importance | Medium |
Labour Efficiency Ratio measures how efficiently labour time is used by comparing the standard hours allowed for actual output with the actual hours worked.
A ratio above 100% indicates better-than-standard efficiency; below 100% indicates inefficiency. It is used for performance evaluation and control.
- Labour productivity tracking
- Departmental performance reporting
- Identifying training needs or process issues
Standard hours for actual production = 2,000; actual hours worked = 1,800. Labour efficiency ratio = (2,000/1,800)×100 = 111.11%, showing workers are more efficient than standard.
Standard hours allowed 1,500; actual hours 1,600. Efficiency ratio = (1,500/1,600)×100 = 93.75%, indicating 6.25% inefficiency.
- Compute standard hours allowed for actual production.
- Record actual hours worked.
- Divide standard by actual and multiply by 100.
- Interpret ratio relative to 100%.
- Use for performance reporting and corrective action.
| Efficiency Ratio vs. Efficiency Variance | Ratio is a percentage; variance is a monetary amount. |
|---|---|
| Efficiency Ratio vs. Capacity Ratio | Capacity ratio = actual hours / budgeted hours; efficiency = standard hours / actual hours. |
4 Labour Hour Rate
| Category | Labour Costing / Overhead Absorption |
|---|---|
| Best Used In | Charging labour and overhead to jobs |
| Key Formula | Labour Hour Rate = (Total Labour Cost + Overheads) / Total Labour Hours |
| Exam Importance | Medium |
Labour Hour Rate is a combined rate used to charge both labour cost and overheads to jobs based on the number of labour hours consumed.
It is computed by dividing the total labour cost plus related overheads by the total number of labour hours, providing a single rate for costing jobs.
- Job costing where labour hours are the main driver
- Overhead absorption using labour hour basis
- Simplifying product costing
A factory’s total direct labour cost ₹2,00,000 and factory overhead ₹1,00,000 for 10,000 labour hours. Labour hour rate = (2,00,000+1,00,000)/10,000 = ₹30 per hour. Each job is charged based on hours worked.
Total labour cost ₹1,50,000, overhead ₹50,000, labour hours 8,000. Labour hour rate = 2,00,000/8,000 = ₹25/hour. Job using 100 hours costs ₹2,500.
- Estimate total direct labour cost for period.
- Estimate total manufacturing overheads.
- Estimate total labour hours for period.
- Divide total costs by total hours to get rate.
- Apply rate to jobs based on labour hours consumed.
| Labour Hour Rate vs. Machine Hour Rate | Machine hour rate uses machine hours and includes machine-related overhead; labour hour rate uses labour hours. |
|---|---|
| Labour Hour Rate vs. Wage Rate | Wage rate is only labour; labour hour rate includes overheads. |
5 Labour Mix Variance
| Category | Standard Costing / Variance Analysis |
|---|---|
| Best Used In | When different grades of labour are used |
| Key Formula | (Revised Standard Hours − Actual Hours) × Standard Rate |
| Exam Importance | Medium |
Labour Mix Variance arises when the actual proportion of different grades of labour used differs from the standard mix, holding total actual hours constant.
It measures the cost impact of using a different blend of skilled, semi-skilled, and unskilled labour than planned.
- Industries with multiple labour grades
- Labour deployment analysis
- Cost control in construction, manufacturing
Standard mix: 60% skilled, 40% unskilled. Actual mix: 50% skilled, 50% unskilled. Mix variance shows cost impact of using more unskilled labour than standard.
Standard: skilled 100 hrs @ ₹120, unskilled 100 hrs @ ₹80. Actual: skilled 120 hrs, unskilled 80 hrs (total 200). Revised standard: skilled 100, unskilled 100. Mix variance = (100-120)×120 + (100-80)×80 = -2400 + 1600 = -₹800 adverse.
- Determine standard mix proportions for each labour grade.
- Compute revised standard hours by applying standard proportion to actual total hours.
- Find difference between revised standard and actual hours for each grade.
- Multiply by standard rate for each grade.
- Sum to get mix variance.
| Mix Variance vs. Yield Variance | Mix isolates proportion effect; yield isolates output effect. |
|---|---|
| Mix Variance vs. Rate Variance | Rate is price effect; mix is proportion effect. |
6 Labour Rate Variance
| Category | Standard Costing / Variance Analysis |
|---|---|
| Best Used In | Wage rate control |
| Key Formula | (Standard Rate − Actual Rate) × Actual Hours |
| Exam Importance | High |
Labour Rate Variance is the difference between the standard wage rate and the actual wage rate paid, multiplied by the actual hours worked.
It measures the effect of paying a higher or lower wage rate than standard for the actual hours used, isolating the price component of labour cost variance.
- Wage negotiation analysis
- Payroll cost control
- Performance evaluation of HR/payroll function
Standard rate ₹100/hour; actual rate ₹110/hour; actual hours 200. Rate variance = (100-110)×200 = ₹2,000 adverse.
Standard rate ₹80/hour; actual rate ₹75/hour; actual hours 300. Rate variance = (80-75)×300 = ₹1,500 favourable.
- Determine standard wage rate for the grade.
- Record actual wage rate paid.
- Record actual hours worked.
- Compute variance using formula.
- Analyze causes (overtime premium, higher grade labour).
| Rate Variance vs. Efficiency Variance | Rate is price; efficiency is hours usage. |
|---|---|
| Rate Variance vs. Total Labour Cost Variance | Total = Rate + Efficiency (+ idle time if separated). |
7 Labour Turnover
| Category | Labour Cost / HR |
|---|---|
| Best Used In | Measuring workforce stability, cost implications |
| Key Formula | Labour Turnover Rate = (Number of employees leaving / Average number employed) × 100 |
| Exam Importance | Medium |
Labour Turnover is the rate at which workers leave an organization and are replaced, indicating workforce stability and associated costs.
High turnover leads to increased recruitment, training, and production disruption costs. It is measured using separation, replacement, or flux methods.
- HR cost analysis
- Labour budgeting and planning
- Identifying retention issues
If a company with an average workforce of 200 loses 40 employees in a year, labour turnover = (40/200)×100 = 20%. This triggers analysis of causes and costs.
Average employees 500; employees left 100; replacements 80. Separation rate = 20%; Replacement rate = 16%; Flux = (100+80)/500 = 36%.
- Determine average number of employees for the period.
- Count separations (left) or replacements.
- Apply chosen formula.
- Calculate turnover percentage.
- Analyze cost implications and take retention measures.
| Labour Turnover vs. Retention Rate | Retention = 100% − turnover; retention measures stability. |
|---|---|
| Separation vs. Replacement Method | Separation uses leavers; replacement uses new hires; flux includes both. |
8 Labour Yield Variance
| Category | Standard Costing / Variance Analysis |
|---|---|
| Best Used In | Measuring output from labour input |
| Key Formula | (Standard Yield for Actual Input − Actual Yield) × Standard Cost per Unit |
| Exam Importance | Medium |
Labour Yield Variance measures the difference between the actual output and the standard output expected from the actual labour hours used.
It focuses on the productivity of the labour mix in terms of output, rather than hours. It is often used when labour mix variance is also computed.
- Process industries with multiple labour grades
- Productivity improvement programs
- Labour efficiency analysis in output terms
Standard: 100 labour hours should produce 500 units. Actual: 100 hours produced 480 units. Standard cost per unit ₹10. Yield variance = (500-480)×10 = ₹200 adverse.
Actual labour hours 200; standard output per hour 5 units → standard output 1000 units. Actual output 950 units. Standard cost per unit ₹20. Yield variance = (1000-950)×20 = ₹1,000 adverse.
- Determine actual labour hours.
- Compute standard yield from actual hours (standard output per hour).
- Compare with actual output.
- Multiply difference by standard cost per unit.
- Interpret: adverse if actual yield < standard yield.
| Yield Variance vs. Mix Variance | Mix isolates proportion effect; yield isolates output effect. |
|---|---|
| Yield Variance vs. Efficiency Variance | Efficiency variance is in hours; yield variance is in units of output. |
9 Lean Accounting
| Category | Contemporary Costing |
|---|---|
| Best Used In | Lean manufacturing environments |
| Key Formula | Value Stream Costing instead of departmental costing |
| Exam Importance | Low |
Lean Accounting is an accounting system designed to support lean manufacturing by focusing on value streams rather than traditional departments, providing more relevant and timely cost information.
It simplifies costing by using value stream costing, eliminating waste in accounting processes, and reporting costs by value stream (end-to-end production flow) rather than by department or function.
- Companies implementing lean manufacturing
- Reducing accounting complexity
- Better decision-making in lean environments
A lean manufacturer identifies its value streams (e.g., product family A, product family B) and accumulates all costs (materials, labour, support) directly to those value streams, rather than allocating overheads through many departments.
Value Stream for Product X incurs direct material ₹50,000, labour ₹30,000, and support (maintenance, setup) ₹10,000. Total value stream cost ₹90,000 for 10,000 units → ₹9/unit. No detailed allocation of support costs.
- Identify value streams (product families).
- Assign all direct and indirect costs to each value stream.
- Measure output of each value stream.
- Compute value stream cost per unit.
- Use for pricing, profitability, and improvement.
| Lean Accounting vs. Traditional Costing | Traditional uses departments and overhead rates; lean uses value streams and direct charging. |
|---|---|
| Lean Accounting vs. Activity-Based Costing | ABC uses multiple cost drivers; lean accounting is simpler, focusing on value streams. |
10 Learning Curve
| Category | Cost Estimation / Labour Efficiency |
|---|---|
| Best Used In | Predicting labour time and cost reductions |
| Key Formula | Y = aX^b (where b = log(learning rate)/log(2)) |
| Exam Importance | Medium |
The Learning Curve (also experience curve) describes how labour time per unit decreases as cumulative production increases, due to learning and efficiency gains.
As workers become more familiar with a task, the time (and cost) to produce each unit declines at a predictable rate. Typically, an 80% learning curve means that when production doubles, average time per unit falls to 80% of previous.
- Labour cost estimation for new products
- Pricing and bidding for large orders
- Budgeting labour costs
A company has an 80% learning curve. First unit takes 100 hours. When cumulative production doubles from 1 to 2 units, average time per unit becomes 80 hours. Total time for 2 units = 160 hours.
80% learning curve, first unit 10 hours. For 4 units: average time per unit = 10 × 4^(log0.8/log2) = 10 × 4^(-0.3219) = 10 × 0.64 = 6.4 hours. Total time for 4 units = 25.6 hours.
- Determine the time for the first unit.
- Determine the learning rate (e.g., 80%).
- Compute exponent b = log(learning rate)/log(2).
- For a given cumulative output X, calculate average time per unit.
- Use to estimate total labour cost and set standards.
| Learning Curve vs. Experience Curve | Experience curve includes all costs (including overheads) not just labour; learning curve is labour-focused. |
|---|---|
| Learning Curve vs. Standard Time | Standard time is set after learning has stabilized; learning curve captures the improvement phase. |
11 Life Cycle Costing
| Category | Contemporary Costing |
|---|---|
| Best Used In | Products with long life cycles, R&D heavy |
| Key Formula | Total Life Cycle Cost = Design + Production + Distribution + Disposal Costs |
| Exam Importance | Medium |
Life Cycle Costing is the accumulation of all costs attributable to a product over its entire life cycle, from design and development through production, use, and disposal.
It considers costs that traditional costing may ignore, such as research and development, after-sales support, and environmental costs, providing a complete picture for pricing and profitability.
- Capital equipment and high-tech products
- Products with significant warranty or disposal costs
- Setting prices to recover all life cycle costs
A pharmaceutical company incurs heavy R&D cost before a drug is launched. Life cycle costing ensures that the total cost (including R&D, production, marketing, and post-market surveillance) is considered when pricing the drug over its patent life.
A product has design cost ₹10,00,000, production cost ₹50/unit for 50,000 units, distribution ₹5/unit, warranty/service ₹10/unit, disposal ₹2/unit. Total life cycle cost = 10,00,000 + (50+5+10+2)×50,000 = ₹33,50,000.
- Identify all stages of the product life cycle.
- Estimate costs for each stage.
- Sum to get total life cycle cost.
- Compare with total life cycle revenue to assess profitability.
- Use for pricing, design decisions, and target costing.
| Life Cycle Costing vs. Traditional Costing | Traditional costing focuses on production stage only; life cycle costing covers all stages. |
|---|---|
| Life Cycle Costing vs. Target Costing | Target costing sets cost based on market price; life cycle costing accumulates actual total cost. |
12 Limiting Factor (Key Factor)
| Category | Decision Making / CVP |
|---|---|
| Best Used In | Product mix decisions under constraints |
| Key Formula | Contribution per unit of limiting factor = Contribution per unit / Units of limiting factor per unit |
| Exam Importance | High |
A Limiting Factor (or Key Factor) is the resource or constraint that limits the volume of output or sales, such as machine hours, labour hours, raw material supply, or market demand.
When a limiting factor exists, production decisions should be based on maximizing contribution per unit of the limiting factor, not just per unit of product.
- Product mix decisions when a resource is scarce
- Capacity planning and scheduling
- Short-term profit maximization
A factory has limited machine hours (1,000/month). Product A contribution ₹20/unit uses 2 machine hours; Product B contribution ₹30/unit uses 5 machine hours. Contribution per machine hour: A = 10, B = 6. Thus, produce more of A.
Total labour hours available 500. Product X: contribution ₹15, labour hours per unit 3 → ₹5/hour. Product Y: contribution ₹12, labour hours per unit 2 → ₹6/hour. Y gives higher contribution per labour hour, so prioritize Y.
- Identify the limiting factor.
- Calculate contribution per unit for each product.
- Determine units of limiting factor required per product.
- Divide contribution per unit by limiting factor usage.
- Rank products and allocate scarce resource to maximize total contribution.
| Limiting Factor vs. Bottleneck | Bottleneck is a specific resource constraint; limiting factor is broader, may be market demand. |
|---|---|
| Limiting Factor vs. Multi-factor Analysis | With multiple limiting factors, linear programming is used. |
13 Linear Programming
| Category | Quantitative Decision Making |
|---|---|
| Best Used In | Optimizing product mix under multiple constraints |
| Key Formula | Maximize Z = Σ cᵢxᵢ subject to constraints |
| Exam Importance | Medium |
Linear Programming (LP) is a mathematical technique used to determine the optimal allocation of limited resources among competing activities to maximize profit or minimize cost.
It involves an objective function (e.g., maximize contribution) and linear constraints (e.g., machine hours, labour hours, materials). The solution identifies the optimal product mix.
- Product mix optimization with multiple limiting factors
- Production planning and resource allocation
- Transportation and logistics problems
A company produces two products with constraints on machine hours and labour hours. LP formulation: maximize Z = 5X + 3Y, subject to machine hours and labour hour constraints, and non-negativity. Solving graphically or via simplex yields optimal X and Y.
Maximize Z = 4A + 3B, subject to: 2A + B ≤ 100 (machine hours), A + 2B ≤ 80 (labour hours). Graphical solution: corner points (0,40), (40,20), (50,0). Evaluate Z: at (40,20) Z = 220, highest. Optimal: A=40, B=20.
- Define decision variables (product quantities).
- Formulate objective function (contribution/profit).
- Identify constraints (resource limits).
- Solve using graphical or simplex method.
- Interpret solution and allocate resources accordingly.
| Linear Programming vs. Single Limiting Factor | Single limiting factor uses simple ranking; LP handles multiple constraints. |
|---|---|
| Linear Programming vs. Simulation | LP provides deterministic optimal; simulation explores probabilistic scenarios. |
14 Loss
| Category | Cost Concept |
|---|---|
| Best Used In | Process costing, financial reporting |
| Key Formula | Loss = Total Cost − Total Revenue (if negative) |
| Exam Importance | Medium |
Loss represents the excess of expenses over revenues in a period, or the reduction in economic value that does not generate benefit.
In costing, loss may refer to normal loss (expected, e.g., evaporation) or abnormal loss (unexpected, e.g., theft, damage). It may also refer to a financial loss when costs exceed sales.
- Process costing (normal and abnormal loss)
- Income statement (net loss)
- Cost sheet (cost overruns)
In a chemical process, input 1,000 kg, normal loss 5% (50 kg), actual loss 80 kg. Abnormal loss = 80−50 = 30 kg. Abnormal loss is valued separately and not included in cost of good units.
Input 1,000 units cost ₹10,000. Normal loss 100 units, actual loss 150 units. Abnormal loss 50 units valued at ₹10/unit = ₹500, charged to Costing P&L, not to good units.
Financial Loss = Total Expenses − Total Revenues (if positive)
- Determine input quantity and cost.
- Compute normal loss (expected).
- Compute actual loss (input − actual output).
- Find abnormal loss = actual − normal.
- Value abnormal loss and exclude from product cost; transfer to P&L.
| Loss vs. Expense | Expense is purposeful and expected; loss is unexpected and non-recurring (e.g., theft, fire). |
|---|---|
| Normal Loss vs. Abnormal Loss | Normal loss is expected and absorbed into product cost; abnormal loss is unexpected and kept separate. |
15 Lump Sum Contract
| Category | Contract Costing |
|---|---|
| Best Used In | Fixed-price construction or engineering projects |
| Key Formula | Contract price fixed; profit = contract price − total cost |
| Exam Importance | Medium |
A Lump Sum Contract is a type of contract where the contractor agrees to complete a project for a fixed total price, regardless of actual costs incurred.
The contractor bears the risk of cost overruns but also benefits from cost savings. It is commonly used in construction and turnkey projects.
- Construction of buildings, bridges
- Turnkey projects with defined scope
- Fixed-price engineering contracts
A builder agrees to construct a house for ₹50,00,000 (lump sum). If actual cost is ₹45,00,000, profit is ₹5,00,000; if cost is ₹55,00,000, loss is ₹5,00,000. Profit is recognized based on work certified and cost of work done.
Contract price ₹1,00,00,000. Total cost incurred ₹80,00,000. Estimated profit ₹20,00,000. Profit recognized based on % completion, using cost incurred to date vs total estimated cost.
- Determine total contract price (fixed).
- Accumulate all costs incurred on the contract.
- Estimate further costs to complete.
- Compute total expected profit = price − total estimated cost.
- Recognize profit over time based on completion percentage (e.g., cost incurred / total cost).
| Lump Sum vs. Cost Plus Contract | Cost plus reimburses actual cost plus a fee; lump sum fixes price regardless of cost. |
|---|---|
| Lump Sum vs. Unit Price Contract | Unit price pays per unit of work; lump sum is fixed for entire scope. |
16 Labour Idle Time Variance
| Category | Standard Costing / Variance Analysis |
|---|---|
| Best Used In | Measuring cost of abnormal idle time |
| Key Formula | Idle Hours × Standard Rate |
| Exam Importance | Medium |
Labour Idle Time Variance represents the cost of abnormal idle time (e.g., machine breakdown, power failure) that was not expected in the standard hours.
It is the portion of labour efficiency variance caused by workers being idle due to reasons beyond their control, valued at standard rate. It is usually separated from efficiency variance.
- Identifying production disruptions
- Labour cost control
- Separating controllable and non-controllable inefficiencies
Standard time for job 100 hours, actual hours 110. Out of actual, 15 hours were idle due to machine breakdown. Idle time variance = 15 × standard rate = adverse; efficiency variance is computed on remaining productive hours.
Standard rate ₹50/hour. Abnormal idle hours 20. Idle time variance = 20 × 50 = ₹1,000 adverse. This is excluded from normal efficiency calculation.
- Record total actual hours.
- Identify abnormal idle hours from time records.
- Multiply idle hours by standard rate.
- Report as adverse variance.
- Investigate cause and take corrective action.
| Idle Time vs. Efficiency Variance | Idle time is a sub-variance of efficiency due to stoppages. |
|---|---|
| Idle Time vs. Overtime Variance | Overtime variance relates to premium for extra hours; idle time is non-productive hours. |
17 Labour Utilisation
| Category | Performance Measurement |
|---|---|
| Best Used In | Measuring effective use of labour hours |
| Key Formula | Labour Utilisation = (Productive Hours / Total Paid Hours) × 100 |
| Exam Importance | Low |
Labour Utilisation measures the percentage of paid labour hours that are actually productive, excluding idle time, absenteeism, and other non-productive time.
It indicates the efficiency of labour deployment; higher utilisation means lower idle time and better cost control.
- Labour cost control
- Identifying idle capacity in workforce
- Improving scheduling and staffing
Total paid hours 8,000; productive hours 7,200 (idle 800). Labour utilisation = (7,200/8,000)×100 = 90%. Management investigates causes of idle time.
Paid hours 10,000, productive 9,500. Utilisation = 95%. This indicates good management of labour time.
- Determine total paid hours for the workforce.
- Determine productive hours (actual hours spent on jobs).
- Compute utilisation percentage.
- Analyse low utilisation for causes of idle time.
- Take action to improve productivity.
| Labour Utilisation vs. Efficiency Ratio | Efficiency ratio compares standard hours to actual productive hours; utilisation compares productive to paid hours. |
|---|---|
| Labour Utilisation vs. Capacity Utilisation | Capacity utilisation refers to machines/facilities; labour utilisation is about workforce time. |
18 Labour Budget
| Category | Budgeting |
|---|---|
| Best Used In | Planning labour hours and cost |
| Key Formula | Labour Budget = Budgeted production × Standard hours per unit × Budgeted wage rate |
| Exam Importance | Medium |
A Labour Budget is a detailed plan of the direct labour hours and cost required to achieve the budgeted production level for a period.
It translates production targets into labour requirements and monetary terms, facilitating labour planning, cost control, and cash flow management for wages.
- Manpower planning
- Labour cost budgeting
- Cash flow planning for payroll
Budgeted production 5,000 units, standard labour hours 0.5 per unit, wage rate ₹80/hour. Labour budget = 5,000 × 0.5 × 80 = ₹2,00,000.
Production budget 12,000 units, labour requirement 1.5 hours/unit, rate ₹100/hr. Total labour budget = 12,000 × 1.5 × 100 = ₹18,00,000.
- Determine budgeted production volume.
- Estimate standard labour hours per unit.
- Determine budgeted wage rate.
- Multiply to get total direct labour cost.
- Use for cash planning and variance analysis.
| Labour Budget vs. Direct Material Budget | Material budget is for raw materials; labour budget is for human resource cost. |
|---|---|
| Labour Budget vs. Labour Hour Budget | Labour hour budget is in hours; labour budget is in monetary terms. |
