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
Pepper corp. just opened another factory to produce scissors.
You've been briefed with the following facts:
- It pays employees $23 per hour.
- It produced 6,000.00 units of scissors.
- It expended 34,000.00 hours of labor.
- It is expected to require 4.5 hours of labor for each unit.
What was the company's labor efficiency variance?
Answer:
- $161,000.00 (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
27,000.00 = 6,000.00 * 4.50 - 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
7,000.00 = 34,000.00 - 27,000.00 - 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
$161,000.00 = 7,000.00 * $23 - Because the variance is positive, the variance is considered unfavorable.