Home page     Downloads      Privacy policy     Disclaimer & terms of use     Contact us     Advertise with us     About us      Link to us

Home Standard Costing and Variance Analysis Direct Labor Efficiency Variance
 

Direct Labor Efficiency Variance

Learning Objective of the article:

  1. Define and explain "direct labor efficiency | usage variance" .
  2. How direct labor efficiency or usage variance is calculated?
  3. What are the reasons / causes of unfavorable or favorable labor efficiency variance?

Contents:

  1. Definition and explanation
  2. Formula of direct labor efficiency variance
  3. Example
  4. Who is responsible for direct labor efficiency variance?
  5. Exercises

Definition and Explanation:

The quantity variance for direct labor  is generally called direct labor efficiency variance or direct labor usage variance. This variance measures the productivity of labor time. No variance is more closely watched by management, since it is widely believed that increasing the productivity of direct labor time is vital to reducing costs. The formula for the labor efficiency variance is expressed as follows:

Formula of labor efficiency variance:

[Labor efficiency variance = (Actual hours worked Standard rate) − (Standard hours allowed Standard rate)]

Example:

A company produces 2000 units of finished products using 5,400 hours. Standard time allowed for a unit of finished product is 2.5 hours. Standard rate that is paid to workers is $14.00 per direct labor hour.

Calculate direct labor efficiency variance or direct labor quantity variance.

Calculation of direct labor efficiency or quantity or usage variance.

Labor efficiency variance = (Actual hours worked Standard rate) − (Standard hours allowed Standard rate)

= (5,400 $14.00 ) − (5,000* $14.00)

= $75,600 − $70,000

= $5,600 Unfavorable

 5,000* = 2,000 actual production 2.50 standard hour allowed per unit

Processing of 2000 units required more time than what was allowed by standards. The result is an unfavorable labor efficiency variance. A favorable labor efficiency variance occurs when actual processing time is less than the time allowed by standards.

Who is Responsible for Labor Efficiency 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. Possible causes / reasons of an unfavorable efficiency variance include poorly trained workers, poor quality materials, faulty equipment, and poor supervision. Another important cause / reason of an unfavorable labor efficiency variance may be insufficient demand for company's products.

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.

Exercises:

Exercise 1: Labor Variance Analysis
The processing of a product requires a standard of 0.8 direct labor hours per unit for Operation 4-802 at a standard wage rate of $6.75 per hour. The 2,000 units actually required 1,580 direct labor hours at a cost of $6.90 per hour.

Required: Calculate labor efficiency variance or Labor usage variance.

Solution:

  Time Rate Amount
Actual hours worked 1,580 $6.75 standard $10,665
Standard hours allowed 1,600 $6.75 standard 10,800
  -------- -------- --------
Labor rate variance (20) $6.75 $(135) fav.
New Page 3

You may also be interested in other articles from "standard costing and variance analysis" chapter

  1. Standard Costs and Management By Exception
  2. Setting Standard Costs - Ideal Versus Practical Standards
  3. Direct Materials Price and Quantity Standards
  4. Direct Materials Price Variance
  5. Direct Materials Quantity Variance
  6. Direct Labor Rate and Efficiency Standards
  7. Direct Labor Rate/Price Variance
  8. Direct Labor Efficiency | Usage | Quantity Variance
  9. Manufacturing Overhead Standards
  10. Overall or net factory overhead variance.
  11. Controllable variance
  12. Volume variance
  13. Spending variance
  14. Idle capacity variance
  15. Efficiency variance
  16. Spending variance
  17. Variable efficiency variance
  18. Fixed efficiency variance
  19. Idle capacity variance
  20. Mix and Yield Variance - Definition and Explanation
  21. Materials Mix and Yield Variance
  22. Labor Yield Variance
  23. Factory Overhead Yield variance
  24. Variance Analysis and Management By Exception
  25. Managerial importance and usefulness of variance analysis
  26. Advantages and Disadvantages of Standard Costing System
  27. Standard Costing Discussion Questions and Answers
  28. Standard Costing and Variance Analysis Formulas
  29. Standard Costing and Variance Analysis Problems and Solution
  30. Standard Costing and Variance Analysis Case Study

 

Downloadable Materials

Learn Accounting Easily With AccountingCoach Pro

View Online or Download all of the materials to Your Computer and Print Immediately

What is Included in Accounting Book
Downloadable Self-Study Materials ( Available in Word Editable Format)
Help in preparation of Online Exams (Available in Word Editable Formatt)
Solved Accounting Problems
Bookkeeping and Financial Statements

Back to Home Page | Back to Standard Costing and Variance Analysis Page

Managerial Accounting

 
Introduction to Managerial Accounting
Business and Quality Improvement Programs
Cost Terms, Concepts and Classification
Job Order Costing system
Process Costing System
Process Costing System - Addition of Materials & Beginning Inventory
Controlling and Costing Materials
Materials and Inventory Cost Control
By Products and Joint Products Costing
Cost-Volume-Profit-Relationship
Variable Costing System
Activity Based Costing System
Budgeting and Planning
Standard Costing and Variance Analysis
Gross Profit Analysis
Linear Programming Technique
Segment Reporting and Transfer Pricing
Capital Budgeting Decisions
Service Department Costing
Cash Flow statement
Financial statement Analysis
Pricing Products and Services
Managerial Accounting Terms and Definitions
Managerial / Cost Accounting Formulas

Financial Accounting

 
Bookkeeping and Bookkeeping Terms
Accounting Principles and Accounting Equation
Journal
Ledger
Accounting For Bills of Exchange
Subdivision of Journal
Final Accounts
Capital and Revenue Items
Single Entry System/Accounting From Incomplete Records
Accounting For Non-Trading Concerns
Accounting for Consignment / Consignment Accounts
Accounting for Joint Ventures
Accounting for Depreciation

About us !

 
Also see formula of gross margin ratio method with financial analysis, balance sheet and income statement analysis tutorials for free download on Accounting4Management.com.Accounting students can take help from Video lectures, handouts, helping materials, assignments solution, Online Quizzes, GDB, Past Papers, books and Solved problems. Also learn latest Accounting & management software technology with tips and tricks.

Home page   Download Material   Privacy policy   Disclaimer & terms of use   Contact us   Advertise with us   About us   Useful links   Link to us

Copyrights of all content on this web site are owned by Accounting For Management except where indicated in source or copyright statements. Accounting For Management must be contacted for permission to copy or redistribute any material published on this website.
Copyright 2014 Accounting For Management. All rights reserved.