The direct labor efficiency variance is similar in concept to direct material quantity variance. The above formula for direct labour efficiency variance includes the following components. Companies can calculate the direct labour efficiency variance using the following formula.

  1. 5: Direct Labor Variance Analysis
  2. What is the Labor Efficiency Variance?
  3. Labor efficiency variance definition
  4. 3 Compute and Evaluate Labor Variances

Favorable variance means that the actual labor hours’ usage is less than the actual labor hour usage for a certain amount of production. Generally, the production department is responsible for direct labor efficiency variance. For example, if the variance is due to low-quality of materials, then the purchasing department is accountable. Before we go on to explore the variances related to indirect costs (manufacturing overhead), check your understanding of the direct labor efficiency variance.


5: Direct Labor Variance Analysis

If the actual hours worked are less than the standard hours at the actual production output level, the variance will be a favorable variance. A favorable outcome means you used fewer hours than anticipated to make the actual number of production units. If, however, the actual hours worked are greater than the standard hours at the actual production output level, the variance will be unfavorable. An unfavorable outcome means you used more hours than anticipated to make the actual number of production units. As a result of this favorable outcome information, the company may consider continuing operations as they exist, or could change future budget projections to reflect higher profit margins, among other things.

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  • Labor yield variance arises when there is a variation in actual output from standard.
  • As with direct materials variances, all positive variances are
    unfavorable, and all negative variances are favorable.
  • 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.
  • A favorable labor efficiency variance indicates better productivity of direct labor during a period.
  • Let’s assume further that instead of the actual hours per unit of 0.4, Techno Blue manufactures was able to produce at 0.25 actual hours per unit.

If the company fails to control the efficiency of labor, then it becomes very difficult for the company to survive in the market. The management estimate that 2000 hours should be used for packing 1000 kinds of cotton or glass. It is a very important tool for management as it provides the management with a very close look at the efficiency of labor work.

What is the Labor Efficiency Variance?

If there is no difference between the actual hours worked and the standard hours, the outcome will be zero, and no variance exists. Recall from Figure 10.1 that the standard rate for Jerry’s is
$13 per direct labor hour and the standard direct labor hours is
0.10 per unit. Figure 10.6 shows how to calculate the labor rate
and efficiency variances given the actual results and standards
information. Review this figure carefully before moving on to the
next section where these calculations are explained in detail.

Labor efficiency variance definition

Like direct labor rate variance, this variance may be favorable or unfavorable. If workers manufacture a certain number of units in an amount of time that is less than the amount of time allowed by standards for that number of units, the variance is known as favorable direct labor efficiency variance. On the other hand, if workers take an amount of time that is more than the amount of time allowed by standards, the variance is known as unfavorable direct labor efficiency variance. The direct labour efficiency variance is a critical component of variance analysis within cost accounting.

3 Compute and Evaluate Labor Variances

From the payroll records of Boulevard Blanks, we find that line workers (production employees) put in 2,325 hours to make 1,620 bodies, and we see that the total cost of direct labor was $46,500. Based on the time standard of 1.5 hours of labor per body, we expected labor hours to be 2,430 (1,620 bodies x 1.5 hours). The direct labor (DL) variance is the difference between the total actual direct labor cost and the total standard cost. If customer orders for a product are requirements for tax exemption not enough to keep the workers busy, the production managers will have to either build up excessive inventories or accept an unfavorable labor efficiency variance. The first option is not in line with just in time (JIT) principle which focuses on minimizing all types of inventories. Excessive inventories, particularly those that are still in process, are considered evil as they generally cause additional storage cost, high defect rates and spoil workers’ efficiency.

At first glance, the responsibility of any unfavorable direct labor efficiency variance lies with the production supervisors and/or foremen because they are generally the persons in charge of using direct labor force. However, it may also occur due to substandard or low quality direct materials which require more time to handle and process. If direct materials is the cause of adverse variance, then purchase manager should bear the responsibility for his negligence in acquiring the right materials for his factory.

The efficiency of labor is the optimum of labor hours available to the best use of the profit-making products in a product mix. In any manufacturing process, the management may decide to use temporary or hour-based labor in case of direct labor shortage or for the production increment purpose. However, in the long term, direct labor efficiency analysis holds more significance in control measures and performance appraisals.

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