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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 Frank inc. just opened another factory to produce bicycles. It pays employees $8 per hour, and it is expected to require 1.1 hours of labor for each unit. It produced 2,000.00 units of bicycles with 21,000.00 of labor.
What was the company's labor efficiency variance?
Answer