Direct Labor Efficiency Variance

Direct labor efficiency variance (also called direct labor usage variance) is the difference between the standard cost of standard direct labor hours allowed for actual production, and the standard cost of labor hours actually used in production.

This is the same as the product of:

  • the standard direct labor rate, and
  • the difference between the standard direct labor hours allowed and actual direct labor hours used.

The direct labor efficiency variance is similar in concept to direct material quantity variance.

Formula

The following formula is used to calculate direct labor efficiency variance:

Direct Labor Efficiency Variance
= Standard Hours at Standard Rate – Actual Hours at Standard Rate
= SH × SR − AH × SR
= (SH − AH) × SR

Where,
SH are the standard direct labor hours allowed,
AH are the actual direct labor hours used, and
SR is the standard direct labor rate per hour.

The standard direct labor hours allowed (SH) in the above formula is the product of standard direct labor hours per unit and number of finished units actually produced.

Analysis

The purpose of calculating the direct labor efficiency variance is to measure the performance of the production department in utilizing the abilities of the workers. A positive value of direct labor efficiency variance is obtained when the standard direct labor hours allowed exceeds the actual direct labor hours used. Thus a positive value is favorable. A negative value of direct labor efficiency variance means that excess direct labor hours have been used in production, implying that the labor-force has under-performed.

It is necessary to analyze direct labor efficiency variance in the context of relevant factors, for example, direct labor rate variance and direct material price variance. It is quite possible that unfavorable direct labor efficiency variance is simply the result of, for example, low quality material being procured or low skilled workers being hired. In case of low quality direct material, the direct material price variance will likely be favorable and in the later case, the direct labor rate variance will probably be favorable; both at the expense of direct labor efficiency variance.

Example

Use the following information to calculate direct labor efficiency variance. State whether the variance is favorable or unfavorable.

Standard Rate Per Hour of Direct Labor$18
Standard Direct Labor Hours Required Per Unit0.2
Actual Units Produced During the Period620
Actual Direct Labor Hours Used During the Period130

Solution

Actual Units Produced620
× Standard Direct Labor Hours Per Unit0.2
Standard Direct Labor Hours Allowed124
− Actual Direct Labor Hours Used130
Difference− 6
× Standard Direct Labor Rate$ 18
Direct Labor Efficiency Variance− $ 108

Since the direct labor efficiency variance is negative, it is unfavorable.

by Irfanullah Jan, ACCA and last modified on

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