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
Frank inc. just opened another factory to produce bicycles.

You've been provided with the following information:

  • It produced 22,000.00 units of bicycles.
  • it usually takes 3.7 hours of labor for each bicycle.
  • The standard rate of pay is $41 per hour.
  • It paid for 50,000.00 hours of labor.
What was the company's labor efficiency variance?

Answer:

  • $-1,287,400.00 (F)

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
    81,400.00 = 22,000.00 * 3.70
  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
    -31,400.00 = 50,000.00 - 81,400.00
  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
    $-1,287,400.00 = -31,400.00 * $41
  7. Because the variance is negative, the variance is considered favorable.
Random BAR Random in Category Try Again