Labor Efficiency Variance

The labor efficiency variance is a measure used to evaluate how well labor is utilised against expected benchmarks. It highlights areas in the production process that may be taking longer than expected.

When the variance is unfavourable, industrial engineers will examine the processes to identify potential improvements that could reduce the number of hours needed for production. Possible adjustments include:

Streamlining product design to facilitate quicker assembly.
Reducing scrap generated during the process.
Increasing the level of automation.
Modifying the existing processes.

If improvements are not feasible, the standard time required to manufacture a product may be adjusted to better reflect current productivity levels.

Challenges of labor efficiency variance

Setting a standard number of hours for production involves estimating the optimal pace at which the production team should operate. Various factors influence this standard, including setup times, material and machine availability, employee skills, and the length of production runs. Because of these variables, creating a reliable standard for comparison with actual performance is inherently tricky.

How to calculate labor efficiency variance?

Labor efficiency variance is calculated by the formula:

(Actual hours - Standard hours) × Standard rate = Labor efficiency variance

An unfavourable variance indicates reduced labor productivity, while a positive variance suggests improved efficiency.

Example of Labor Efficiency Variance

In the scenario with Trident Plastics, the standard time to produce one plastic glass is set at 30 minutes (or 0.5 hours), and the actual time taken was 45 minutes (or 0.75 hours) per glass. Over one month, 1,000 glasses were produced. The standard labor cost is $20 per hour.

First, calculate the total standard and actual hours:

Total standard hours = 0.5 hours × 1,000 glasses = 500 hours
Total actual hours = 0.75 hours × 1,000 glasses = 750 hours

Then, apply the formula:

(500 standard hours - 750 actual hours) × 20 per hour = −5,000 labor efficiency variance.

This calculation shows a negative variance of $5,000, indicating that labor was less efficient than planned, consuming more hours than anticipated and increasing costs accordingly.

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Causes of labor efficiency variance

Several factors can contribute to a labor efficiency variance, including:

Instructions: Workers might need clearer written instructions.
Worker Mix: The assumed mix of skill levels in the standard may not match the actual workforce.
Training: Standards might assume workers have received specific training they have yet to receive.
Workstation Configuration: A work center might have been reconfigured since the standard was established, making it outdated.

Tracking labor efficiency variance is most useful for recurring processes. For products made infrequently or over long periods, monitoring this variance might be less beneficial.

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