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Labor Efficiency Variance

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The labor efficiency variance is a calculation that shows how much more was spent on direct labor than expected, assuming the dollars per hour were as planned.

The numerical variance is often marked with an F if it's favorable (less labor was required) or with a U if it's unfavorable (more labor was required).

Of course, the favorable or unfavorable mark can be very misleading. Favorable isn't always good and unfavorable isn't always bad. For instance:

  • An unfavorable (positive) variance may result when quality standards go up
  • A favorable (negative) variance may result when quality standards go down
Question Harvey Co. just opened another factory to produce unicycles. It pays employees $10 per hour, and it is expected to require 2 hours of labor for each unit. It produced 25,000.00 units of unicycles with 61,000.00 of labor.
What was the company's labor efficiency variance?
Answer