Generally, the production department is responsible for direct labor efficiency variance. For example, if the variance is due to low-quality of materials, then the purchasing department is accountable. Watch this video presenting an instructor walking through the steps involved in calculating direct labor variances to learn more. 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.
This is a favorable outcome because the actual rate of pay was less than the standard rate of pay. As a result of this favorable outcome information, the company may consider continuing operations as they exist, or could change future budget projections to reflect higher profit margins, among other things. With either of these formulas, the actual rate per hour refers to the actual rate of pay for workers to create one unit of product. The standard rate per hour is the expected rate of pay for workers to create one unit of product. The actual hours worked are the actual number of hours worked to create one unit of product. If there is no difference between the standard rate and the actual rate, the outcome will be zero, and no variance exists.
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- The direct labor efficiency variance may be computed either in hours or in dollars.
- The standard rate per hour is the expected hourly rate paid to workers.
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In this case, the actual rate per hour is $9.50, the standard rate per hour is $8.00, and the actual hours worked per box are 0.10 hours. This is an unfavorable outcome because the actual rate per hour was more than the standard rate per hour. As a result of this unfavorable outcome information, the company may consider using cheaper labor, changing the production process to be more efficient, or increasing prices to cover labor costs. There is a favorable direct labor efficiency variance when the actual hours used is less than the anticipated or standard hours.
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Like direct labor rate variance, this variance may be favorable or unfavorable. If workers manufacture a certain number of units in an amount of time that is less than the amount of time allowed by standards for that number of units, the variance is known as favorable direct labor efficiency variance. On the other hand, if workers take an amount of time that is more than the amount of time allowed by standards, the variance is known as unfavorable direct labor efficiency variance. When a company makes a product and compares the actual labor cost to the standard labor cost, the result is the total direct labor variance. In this case, two elements are contributing to the unfavorable outcome. Connie’s Candy paid $1.50 per hour more for labor than expected and used 0.10 hours more than expected to make one box of candy.
What is the difference between labor rate and efficiency variance?
Since this measures the performance of workers, it may be caused by worker deficiencies or by poor production methods. Labor mix variance is the difference between the actual mix of labor and standard mix, caused by hiring or training costs. Favorable variance means that direct labor efficiency variance formula the actual labor hours’ usage is less than the actual labor hour usage for a certain amount of production. Before we go on to explore the variances related to indirect costs (manufacturing overhead), check your understanding of the direct labor efficiency variance.
Direct Labor Efficiency VarianceWhat is DL efficiency variance?
This is a favorable outcome because the actual hours worked were less than the standard hours expected. If the actual rate of pay per hour is less than the standard rate of pay per hour, the variance will be a favorable variance. If, however, the actual rate of pay per hour is greater than the standard rate of pay per hour, the variance will be unfavorable. Where,SH are the standard direct labor hours allowed,AH are the actual direct labor hours used, andSR is the standard direct labor rate per hour.
However, it may also occur due to substandard or low quality direct materials which require more time to handle and process. If direct materials is the cause of adverse variance, then purchase manager should bear the responsibility for his negligence in acquiring the right materials for his factory. The Purple Fly has experienced a favorable direct labor efficiency variance of $219 during the second quarter of operations because its workers were able to finish 1,200 units in fewer hours (3,780) than the hours allowed by standards (3,840). The use of excessive hours could be due to employing under-qualified workers (may be evidence by cheaper wages, hence a favorable direct labor rate variance), or due to poor quality of raw materials (favorable direct materials price variance).