Direct Labor Efficiency Variance:
Definition and Explanation:
Labor efficiency variance is calculated by
comparing the actual hours worked with standard
hours allowed, both at the standard labor rate. The
standard hours allowed figure is determined by
multiplying direct labor hours
established or predetermined to produce a single
unit by the number of units produced. For example,
if standard time to produce one unit of a product is
2 hours and 10 units of product have been
manufactured during the period than the standard
time allows would be 20 hours (2
×
10).
The units produced are the equivalent units of
production for the labor cost being analyzed. Labor
efficiency variance is also known as labor time
variance and labor usage variance.
Formula:
Following formula is used to calculate labor
efficiency
variance.
Labor
efficiency variance = (Actual hours worked ×
Standard rate) - (Standard hours allowed ×
Standard rate) |
Example:
Assume
that 1,880 hours are worked at a rate of $6.50 per
hour to produce 530 equivalent units of product. The
standard labor rate per hour is $6.00 and standard
time allowed to produce a unit of product is 3
hours.
Required: Calculate direct labor efficiency variance.
Solution:
|
Time |
× |
Rate |
= |
Amount |
Actual hours worked at standard
rate |
1,880 |
|
$6.00 standard |
|
$11,280 |
Standard hours allowed at standard
rate |
1,590 |
|
$6.00 standard |
|
9,540 |
|
|
|
|
|
|
|
290 |
|
|
|
$1,740 unfav. |
|
|
|
|
|
|
|
The standard hours allowed is the result of
multiplying 530 units of product by 3
standard hours per unit. The unfavorable labor
efficiency variance of $1,740 is due to the use
of 290 hours in excess of standard hours
allowed.
Causes of Unfavorable Labor Efficiency/Usage Variance:
Possible causes of an unfavorable efficiency
variance include poorly trained workers, poor quality materials, faulty
equipment, and poor supervision. Another important reason of an unfavorable
labor efficiency variance may be insufficient demand for company's products.
Who is Responsible for the Labor Efficiency/Usage Variance?
The manager in charge of production is generally
considered responsible for labor efficiency
variance. However, purchase manager could be
held responsible if the acquisition of poor
materials resulted in excessive labor processing
time.
If
customers orders are insufficient to keep the
workers busy, the work center manager has two
options, either accept an unfavorable labor
efficiency variance or build up inventories.
The second option is opposite to the basic
principle of just in time (JIT). Inventories
with no immediate prospect of sale is a bad idea
according to just in time approach. Inventories,
particularly work in process inventory leads to
high defect rate, obsolete goods, and generally
inefficient operations. As a consequence, when
the work force is basically fixed in the short
term, managers must be cautious about how labor
efficiency variances are used. Some managers
advocate dispensing with labor efficiency
variance entirely in such situations―at least
for the purpose of motivating and controlling
workers on the shop floor.
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