Direct labor efficiency variance is the measure of the efficiency of the direct labor that is applied to any project within a business company. It can be defined as the measure of the difference the standard cost of the direct labor hours that are utilized in a certain period and the actual cost of the labor hours that actually utilized to achieve the level output. Formula of direct labor efficiency variance can be shown as under:-
Direct Labor Efficiency Variance = Actual labor hours x Standard Rate – Standard Labor hours x Standard Rate
That can be further simplified as under:-
Direct Labor Efficiency Variance = Standard Cost of Actual Labor Hours – Standard Cost
The direct labor efficiency is always calculated by using the standard rate. If the direct labor efficiency rate is favorable that means the labor is efficient and there will better productivity of the direct labor for a certain project. On the other hand if the direct labor efficiency variance is unfavorable that means the labor is non productive and business entity is going to bear some loss regarding that project in a particular accounting period. There are a number of causes of favorable and unfavorable labor efficiency variance. For example the favorable labor efficiency variance can be due to hiring of skilled and experienced labor, implementation of training for improved work force and production techniques, use of better quality raw materials and many others. On the other hand causes of unfavorable labor efficiency variance can be hiring of lower skilled labor, de-motivated and low morale staff, presence of idle time during the working hours etc.