Labor Efficiency Variance

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

👉 Answer:

👨‍🎓 Here's how we arrived at the answer:

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
   900.00 = 3,000.00 * 0.30
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
   25,100.00 = 26,000.00 - 900.00
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
   $878,500.00 = 25,100.00 * $35
7. Because the variance is positive, the variance is considered unfavorable.