Direct labor efficiency variance depicts how efficient the direct labor was in making the actual output produced by the direct labor.
The direct labor efficiency variance compares the standard hours it should have taken to make the actual output Vs. the actual hours it took and multiplies the difference in hours by the standard cost per direct labor hour.
Direct Labor efficiency variance
= Actual Hours X Standard Rate – Standard Hours X Standard Rate
= Standard Cost of Actual Hours – Standard Cost
The labor efficiency variance measures the ability to utilize labor by expectations.
Suppose workers manufacture a certain number of units in less than the amount of time allowed by standards for that number of units. The variance is known as favorable direct labor efficiency variance in that case.
On the other hand, if workers take more time than the amount of time allowed by standards, the variance is known as adverse direct labor efficiency variance.
favorable labor efficiency variance indicates better productivity of direct labor during a period. The reasons for favorable labor efficiency variance might include:
The hiring of higher-skilled labor:
Training of workforce in improved production techniques and methodologies
Use of better-quality raw materials which are easier to handle
Labor had a better learning curve than anticipated.
An adverse labor efficiency variance suggests lower direct labor productivity during a period compared with the standard.
The reasons for adverse labor efficiency variance include:
The hiring of lower-skilled labor than the standard
A lower learning curve was achieved during the period than anticipated in the standard
Incurring idle time during working hours.
2049 Inc, a smartphone manufacturer manufactured 1000 smartphones. Information relating to direct labor cost and production time is as follows.
Direct Labor = 50 actual hours per unit
Standard hours = 60 hours per unit
Actual rate per hour = $12
Standard rate per hour = $10
Actual hours = 1000 X 50 = 50,000 hours
Standard hours for actual units = 10,000 X 60 = 60,000 hour
Standard cost of actual hours = 50000 X 10 = $500,000
Standard Cost = 60,000 X 10 = $600,000
Labor efficiency variance
= Standard cost of actual hours – Standard Cost
= 500,000 – 600,000
= $100,000 Favorable