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
Zero Morals, inc. just opened another factory to produce chairs.
You've been provided with the following information:
- It is expected to require 3.3 hours of labor for each unit.
- It expended 26,000.00 hours of labor.
- It pays employees $38 per hour.
- It produced 5,000.00 units of chairs.
What was the company's labor efficiency variance?
Answer:
- $361,000.00 (U)
Explanation:
- Calculate the standard hours (the hours of labor the work should have taken)
HOURS PREDICTED = UNITS PRODUCED * STANDARD LABOR PER UNIT - Let's plug in the numbers
16,500.00 = 5,000.00 * 3.30 - Next, figure out how many hours more than the expected (standard) were used:
MORE HOURS THAN STANDARD = HOURS SPENT - HOURS PREDICTED - Let's plug in the numbers
9,500.00 = 26,000.00 - 16,500.00 - Finally, multiply the result by the labor rate.
LABOR EFFICIENCY VARIANCE = MORE HOURS THAN STANDARD * LABOR COST PER HOUR - Let's plug in the numbers
$361,000.00 = 9,500.00 * $38 - Because the variance is positive, the variance is considered unfavorable.