The difference between actual time incurred to manufacture a certain number of units and the time allowed by standards to manufacture that number of units multiplied by standard direct labor rate is called direct labor efficiency variance or direct labor quantity variance.
Favorable and unfavorable variance:
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.
The direct labor efficiency variance may be computed either in hours or in dollars. Suppose, for example, the standard time to manufacture a product is one hour but the product is completed in 1.15 hours, the variance is 0.15 hours – unfavorable. If the labor cost is $6.00 per hour the variance in dollars would be $0.90 (0.15 hours × $6.00). For proper financial measurement the variance is normally expressed in dollars.
The following formula is used to calculate this variance:
Direct labor efficiency variance = (Actual hours worked × Standard rate) – (Standard hours allowed × Standard rate)
Nice furniture manufacturing company presents the following data for the month of March 2016.
Standard direct labor rate per hour: $6.50
Actual direct labor rate per hour: $6.75
Standard time to produce on unit of product: 3 hours
Production during the month of March 2016: 600 units
Hours worked during the month of March: 1850 hours
- Compute direct labor efficiency variance.
- Indicate whether the variance is favorable or unfavorable.
Direct labor efficiency variance = (AH × SR) – (SH × SR )
= (1850 hours × $6.50) – (1,800 hours × $6.50)
= $12,025 – $11,700
= $325 unfavorable
The variance is unfavorable because labor worked 50 hours more than what was allowed by standard.
Alternatively, the variance can be calculated by using factored formula as follows:
Direct labor efficiency variance = SR × (AH – SH)
= $6.50 × ( 1,850 hours – 1,800 hours * )
= $6.50 × 50 hours
= $325 Unfavorable
*Standard hours allowed to manufacture 600 units:
600 units × 3 hours = 1,800 hours
Note: The actual direct labor rate is not used to compute this variance.
Causes of unfavorable direct labor efficiency variance:
There are a lot of reasons of unfavorable direct labor efficiency variance. Some common reasons are as follows:
- Inexperienced workers
- Poorly motivated workers
- Old or faulty equipment
- Purchase of low quality or unsuitable direct materials
- Poor supervision
- Insufficient demand for company’s product
- Frequent breakdowns
- Shortage of raw materials
- Just in time manufacturing system