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Labor Efficiency Variance

Lesson
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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
Jenny LLC just opened another factory to produce combs.

This is what you've been told:

  • It paid for 90,000.00 hours of labor.

  • it usually takes 3.4 hours of labor for each comb.

  • The standard rate of pay is $18 per hour.

  • It produced 23,000.00 units of combs.

What was the company's labor efficiency variance?
Answer
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👉 Answer:

  • $212,400.00 (U)

👨‍🎓 This is how we solve it:

  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
    78,200.00 = 23,000.00 * 3.40
  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
    11,800.00 = 90,000.00 - 78,200.00
  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
    $212,400.00 = 11,800.00 * $18
  7. Because the variance is positive, the variance is considered unfavorable.
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