Labor Efficiency Variance
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Labor efficiency variance is a metric used in standard costing that measures the difference between the actual number of labor hours worked and the standard hours expected to complete a given level of production, multiplied by the standard hourly labor rate. It identifies whether a business has used more or less labor than anticipated to achieve its output, and helps management assess workforce productivity.
In depth
A favorable labor efficiency variance occurs when fewer hours are used than the standard allows, meaning the workforce completed the required production more efficiently than planned. An unfavorable variance occurs when more hours are needed than the standard, indicating that production took longer than expected, which increases labor costs and reduces profitability. Common causes of unfavorable labor efficiency variances include inadequate employee training, poor production planning, equipment downtime, high staff turnover, or the use of lower-skilled workers than the standard assumes.
Example
Let's consider a real-world example of a furniture manufacturing business that uses standard costing to monitor its production performance.
The business sets the following standards for producing one unit of its flagship product:
Standard labor hours per unit: 4 hours
Standard labor rate: $15 per hour
Planned production for the month: 500 units
Based on these standards, the expected total labor hours for the month are:
Standard Hours = 500 units x 4 hours = 2,000 hours
At the end of the month, the actual results are:
Units produced: 500
Actual labor hours worked: 2,200 hours
Calculate the labor efficiency variance:
Labor Efficiency Variance = (Standard Hours - Actual Hours) x Standard Rate
Labor Efficiency Variance = (2,000 - 2,200) x $15 = -200 x $15 = -$3,000
The negative result indicates an unfavorable variance. The business used 200 more labor hours than planned to produce the same 500 units, resulting in an additional $3,000 in unplanned labor costs.