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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 Bill corp. just opened another factory to produce hats. It produced 2,000.00 units of hats with 42,000.00 of labor. The standard rate of pay is $18 per hour, and it usually takes 1.7 hours of labor for each unit.
What was the company's labor efficiency variance?
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