Labor Efficiency Variance

Lesson:

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
Howard corp. just opened another factory to produce keyboards.

You've been briefed with the following facts:

  • It pays employees $31 per hour.
  • It expended 91,000.00 hours of labor.
  • It is expected to require 3.6 hours of labor for each unit.
  • It produced 16,000.00 units of keyboards.
What was the company's labor efficiency variance?

Answer:

  • $1,035,400.00 (U)

Explanation:

  1. Calculate the standard hours (the hours of labor the work should have taken)
    HOURS PREDICTED = UNITS PRODUCED * STANDARD LABOR PER UNIT
  2. Let's plug in the numbers
    57,600.00 = 16,000.00 * 3.60
  3. Next, figure out how many hours more than the expected (standard) were used:
    MORE HOURS THAN STANDARD = HOURS SPENT - HOURS PREDICTED
  4. Let's plug in the numbers
    33,400.00 = 91,000.00 - 57,600.00
  5. Finally, multiply the result by the labor rate.
    LABOR EFFICIENCY VARIANCE = MORE HOURS THAN STANDARD * LABOR COST PER HOUR
  6. Let's plug in the numbers
    $1,035,400.00 = 33,400.00 * $31
  7. Because the variance is positive, the variance is considered unfavorable.
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