How to Calculate Direct Labor Efficiency Variance? Definition, Formula, and Example

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Interpretation of the variable overhead rate variance is often difficult because the cost of one overhead item, such as indirect labor, could go up, but another overhead cost, such as indirect materials, could go down. Often, explanation of this variance will need clarification from the production supervisor. Another variable overhead variance to consider is the variable overhead efficiency variance. To compute the direct labor quantity variance, subtract the standard cost of direct labor ($48,000) from the actual hours of direct labor at standard rate ($43,200). This math results in a favorable variance of $4,800, indicating that the company saves $4,800 in expenses because its employees work 400 fewer hours than expected.

The direct labor efficiency variance is one of the main standard costing variances, and results from the difference between the standard quantity and the actual quantity of labor used by a business during production. Additionally the variance is sometimes referred to as the direct labor usage variance or the direct labor quantity variance. 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.

When it comes to seeking efficiency, technology is your best friend. Tedious and repetitive tasks can be automated so you can free up more work hours for other important tasks. For instance, more and more companies are using IoT software like Spot-r by Triax to streamline labor management, optimize operations, and monitor machine and equipment utilization, to name a few. Make sure there are no bottlenecks in the production line that can impede the process. For example, it is vital that there’s a balance of workloads between workers in the assembly line.

During emergencies, you can also use the dashboard to trigger the site wide alarms and monitor evacuation progress. This will boost your company’s emergency preparedness and reduce evacuation time. In fact, adopting a solution such as Spot-r has helped companies lower crucial evacuation and mustering times by at least 70% or more. Productivity and efficiency payintuit are often used interchangeably in business. Although these concepts are different in the strictest sense of these words, they are interdependent, but both are key metrics that determine how well your workforce is performing. Triax helped identify waste within the equipment budget to improve overall cost controls and right-size equipment rental.

  1. Additionally full details of the journal entry required to post the variance, standard cost and actual cost can be found in our direct labor variance journal tutorial.
  2. To compute the direct labor quantity variance, subtract the standard cost of direct labor ($48,000) from the actual hours of direct labor at standard rate ($43,200).
  3. The actual hours worked are the actual number of hours worked to create one unit of product.

Doctors, for example, have a time allotment for a physical exam and base their fee on the expected time. Insurance companies pay doctors according to a set schedule, so they set the labor standard. They pay a set rate for a physical exam, no matter how long it takes. If the exam takes longer than expected, the doctor is not compensated for that extra time. Doctors know the standard and try to schedule accordingly so a variance does not exist. If anything, they try to produce a favorable variance by seeing more patients in a quicker time frame to maximize their compensation potential.


In simpler terms, the variance tells you exactly how many hours you invested as compared to expectations. 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. In this case, the actual hours worked are 0.05 per box, the standard hours are 0.10 per box, and the standard rate per hour is $8.00. This is a favorable outcome because the actual hours worked were less than the standard hours expected. 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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If the balance is considered insignificant in relation to the size of the business, then it can simply be transferred to the cost of goods sold account. Mark P. Holtzman, PhD, CPA, is Chair of the Department of Accounting and Taxation at Seton Hall University. He has taught accounting at the college level for 17 years and runs the Accountinator website at , which gives practical accounting advice to entrepreneurs.

Labor Efficiency Variance

Any of these issues can prevent workers from using their time as well as competitors in the industry. 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 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. Labor efficiency variance is the difference between the time we plan and the actual time spent in production. It is the difference between the actual hours spent and the budgeted hour that the company expects to take to produce a certain level of output.

He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics. Labor productivity refers to the work output accomplished using the resources available. Productivity is more on getting as much output given a certain timeframe while efficiency is focused on getting the same amount of output in less amount of time. Whereas efficiency is focused more on work quality, productivity is more about work quantity. Labor efficiency measures how well employees accomplish certain tasks in comparison to industry standards, and optimizing this KPI can result in a major boost in your company’s bottom line. And Triax Technologies is the perfect partner to achieve this on your industrial site.

In this case, two elements are contributing to the unfavorable outcome. Connie’s Candy paid $1.50 per hour more for labor than expected and used 0.10 hours more than expected to make one box of candy. The same calculation is shown as follows using the outcomes of the direct labor rate and time variances. Figure 8.4 shows the connection between the direct labor rate variance and direct labor time variance to total direct labor variance. With either of these formulas, the actual hours worked refers to the actual number of hours used at the actual production output. The standard rate per hour is the expected hourly rate paid to workers.

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Figure 8.5 shows the connection between the variable overhead rate variance and variable overhead efficiency variance to total variable overhead cost variance. The total direct labor variance is also found by combining the direct labor rate variance and the direct labor time variance. By showing the total direct labor variance as the sum of the two components, management can better analyze the two variances and enhance decision-making. 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.

The standard hours are the expected number of hours used at the actual production output. If there is no difference between the actual hours worked and the standard hours, the outcome will be zero, and no variance exists. In this case, the actual rate per hour is $7.50, the standard rate per hour is $8.00, and the actual hour worked is 0.10 hours per box. This is a favorable outcome because the actual rate of pay was less than the standard rate of pay. The actual rate can differ from the standard or expected rate because of supply and demand of the workers, increased labor costs due to economic changes or union contracts, or the ability to hire employees at a different skill level. In this question, the company has experienced an unfavorable direct labor efficiency variance of $325 during March because its workers took more hours (1,850) than the hours allowed by standards (1,800) to complete 600 units.

The combination of the two variances can produce one overall total direct labor cost variance. Favorable variance means that the actual labor hours’ usage is less than the actual labor hour usage for a certain amount of production. The fixed factory overhead variance represents the difference between the actual fixed overhead and the applied fixed overhead. One variance determines if too much or too little was spent on fixed overhead.

However, employees actually worked 3,600 hours, for which they were paid an average of $13 per hour. Before we go on to explore the variances related to indirect costs (manufacturing overhead), check your understanding of the direct labor efficiency variance. The direct labor efficiency variance is similar in concept to direct material quantity variance. The labor efficiency variance is also known as the direct labor efficiency variance, and may sometimes be called (though less accurately) the labor variance. Note that this is a positive number, so you have unfavorable variance. That’s easy to justify since you spent 13 more hours on labor than you expected.

Together with the price variance, the efficiency variance forms part of the total direct labor variance. A direct labor variance is caused by differences in either wage rates or hours worked. As with direct materials variances, you can use either formulas or a diagram to compute direct labor variances. We may think that only unfavorable variance is required to solve as it impacts the profit at the end of the year.

One factor that could adversely impact efficiency is machine breakdown. Equipment issues will always be a problem you have to contend with in an assembly line. However, the one mitigating factor that can help with your efficiency is your organization’s ability to fix and resolve issues when they arise. And Spot-r helps you monitor equipment usage so you will know unproductive machinery in real-time. When you make the most of variance analysis, you can quickly find efficiency problems and resolve them. On the other side of the coin, personnel efficiency problems usually stem from poor morale, low learning curves or a lack of skill.

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