Direct Labor Efficiency Variance
Direct Labor Efficiency Variance is the measure of difference between the standard cost of actual number of direct labor hours utilized during a period and the standard hours of direct labor for the level of output achieved.
Direct Labor Effciency Variance:
= Actual Hours x Standard Rate - Standard Hours x Standard Rate
= Standard Cost of Actual Hours - Standard Cost
Note: As the effect of difference between standard rate and actual rate of direct labor is accounted for separately in the direct labor rate variance, the efficiency variance is calculated using the standard rate.
DM is a denim brand specializing in the manufacture and sale of hand-stitched jeans trousers.
DM manufactured and sold 10,000 pairs of jeans during a period.
Information relating to the direct labor cost and production time per unit is as follows:
Labor rate variance shall be calculated as follows:
Step 1: Calculate Actual hours
Actual Hours = 10,000 units x 0.5 hours per unit
= 5,000 hours.
Step 2: Calculate the standard cost of actual number of hours
Standard Cost of Actual Hours = Actual Hours x Standard Rate
= 5,000 hours (Step 1) x $10 per hour
Step 3: Calculate the standard hours
Standard hours = 10,000 units x 0.60 hours per unit
= 6,000 hours.
Step 4: Calculate the standard cost
Standard Cost = Standard Hours x Standard Rate
= 6,000 hours (Step 3) x $10 per hour
Step 5: Calculate the variance
Labor Efficiency Variance = Standard Cost of Actual Hours - Standard Cost
= $50,000 (Step 2) - $60,000 (Step 4)
= $10,000 Favorable.
A favorable labor efficiency variance indicates better productivity of direct labor during a period.
Causes for favorable labor efficiency variance may include:
- Hiring of more higher skilled labor (this may adversely impact labor rate variance)
- Training of work force in improved production techniques and methodologies
- Use of better quality raw materials which are easier to handle
- Higher learning curve than anticipated in the standard
An adverse labor efficiency variance suggests lower productivity of direct labor during a period compared with the standard.
Reasons for adverse labor efficiency variances may include:
- Hiring of lower skilled labor than the standard (this should be reflected in a favorable labor rate variance)
- Lower learning curve achieved during the period than anticipated in the standard
- Decrease in staff morale and motivation
- Idle time incurred during a period caused by disruption or stoppage of activities (idle time variance may be calculated separately from the labor efficiency variance to reflect the underlying increase or decrease in labor productivity during a period)