Direct Labor Efficiency Variance

Direct labor efficiency variance (also called direct labor quantity/usage variance) is the product of standard direct labor rate and the difference between the standard direct labor hours allowed and actual direct labor hours used. The basic concept of direct labor efficiency variance is similar to that of direct material quantity variance. The following formula is used to calculate direct labor efficiency variance:

DL Efficiency Variance = ( SH − AH ) × SR

Where,
   SH are the standard direct labor hours allowed
   AH are the actual direct labor hours used
   SR is the standard direct labor rate per hour

The standard direct labor hours allowed (SH) in the above formula is the product of standard direct labor hours per unit and number of finished units actually produced.

Analysis

The purpose of calculating the direct labor efficiency variance is to measure the performance of production department in utilizing the abilities of the workers. A positive value of direct labor efficiency variance is obtained when the standard direct labor hours allowed exceeds the actual direct labor hours used. Thus a positive value is favorable. Negative value of direct labor efficiency variance implies that more direct labor hours have been used than actually needed.

It is necessary to analyze direct labor efficiency variance along with direct labor rate variance. It is quite possible that unfavorable direct labor efficiency variance is simply the result of recruiting low skilled workers. In which case direct labor rate variance will become favorable at the expense of direct labor efficiency.

Example

Use the following information to calculate direct labor efficiency variance. State whether the variance is favorable or unfavorable.

Standard Rate Per Hour of Direct Labor$ 18
Standard Direct Labor Hours Required Per Unit0.2
Actual Units Produced During the Period620
Actual Direct Labor Hours Used During the Period130
 
Solution
 
Actual Units Produced620
× Standard Direct Labor Hours Per Unit0.2
Standard Direct Labor Hours Allowed124
 
Standard Direct Labor Hours Allowed124
− Actual Direct Labor Hours Used130
Difference− 6
× Standard Direct Labor Rate$ 18
Direct Labor Efficiency Variance− $ 108

Since the direct labor efficiency variance is negative, it is unfavorable.

Written by Irfanullah Jan