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
Romeo Industries just opened another factory to produce pencils.

You've been provided with the following information:

  • The standard rate of pay is $24 per hour.
  • It produced 22,000.00 units of pencils.
  • it usually takes 1.4 hours of labor for each pencil.
  • It paid for 60,000.00 hours of labor.
What was the company's labor efficiency variance?

Answer:

  • $700,800.00 (U)

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
    30,800.00 = 22,000.00 * 1.40
  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
    29,200.00 = 60,000.00 - 30,800.00
  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
    $700,800.00 = 29,200.00 * $24
  7. Because the variance is positive, the variance is considered unfavorable.
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