Importance and Limitations of Direct Labor Efficiency Variance

Introduction

Variances are calculated to Analyze Company’s planning with actual results. The difference between the actual number of hours per unit and budgeted number of hours per unit, valued at a specific wage rate is called direct labor efficiency variance.

The labor efficiency variance calculates and measures the ability to utilize labor according to expectations.

The variances are important tools to highlight all the areas of production processes which are consuming more labor hours than expected.

The positive results are termed as favorable while bad results are known as an unfavorable variance.

The formula for Direct Labor Efficiency Variance:

The formula for direct labor efficiency can be expressed as:

(Actual hours – standards hours) × Standard rate = labor efficiency variance.

The favorable results will show you that the company’s labor has worked efficiently and according to the plan of management.

While the unfavorable efficiency variance shows that the company’s labor does not achieve the standards needed to complete one unit.

Importance of direct labor efficiency variance:

The available labor hours are always important for companies as they are considered one of the scarce resource.

Efficiently use of labor hour is very beneficial for the company.

And that’s why companies make special attention to this segment. Because in today’s cut-throat competition selling price is really matters and labor efficiency can play a major part in lowering the cost of any product.

Helps in Decision Making:

The direct labor efficiency variance plays an important role in decision making, as it provides useful information about the company’s actual labor efficiency.

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Most of the manufacturing companies nowadays use standard costing to enhance the efficiency of direct labors as they motivate their labor to achieve the best standards in the industry.

Due to best standards implemented the production of company increase without paying extra to the workers.

Which results in lower the cost of goods sold, and the company can get high benefits is sales by lowering their sales price in the market.

Helps in Cost Control:

As the standards are always set in accordance with the best practices of the industry.

It means that the performance of labor will be matched with the best workers and identify the problems if there is an unfavorable variance.

The implementation of high standards in labor departments will enhance the production capacity of the company which is the ultimate results in controlling the cost of the company’s products.

Act as Motivational Factor:

The achievement of the goal is always a very positive impact on human life. The standards sets by the company for labor should achievable so that it will act as a motivational factor for the labor.

Limitations of Direct Labor Efficiency Variance:

The standards can be achieved by the companies by announcing any extra benefits to the labor so everyone will try to achieve the set standards.

So in this way, the unfavorable variance can be changed to favorable.

The direct labor variance has some limitations which may affect the results. There are some controllable and non-controllable factors associated with labor efficiency.

Managers should be aware of all these factors and update their planning accordingly.

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If there is a dramatic technological change comes in the industry, the labor will take time to get used to it, in this way the efficiency variance of the company will go down.

Because the formula of direct labor efficiency variance does not take these accounts in considerations. So the managers should revise their budget to motivate the labors.

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