# Direct labor efficiency variance

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.

## Formula

The following formula is used to calculate this variance:

**Direct labor efficiency variance = (Actual hours worked × Standard rate) – (Standard hours allowed × Standard rate)**

## Example

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

**Required****: **

- Compute direct labor efficiency variance.
- Indicate whether the variance is favorable or unfavorable.

### Solution

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

6 Comments on Direct labor efficiency varianceDirect Labor Efficiency Variance =

(St. Hrs – Actual Hrs) x Std. Rate

please correct it.

Both are used.

And then there is no effect on their answer i mean (+ or -)??

tell me please about.

labour efficiency is zero?

what about labour efficiency variance = (std hrs *std rate) – (actual hrs paid *AR)

Can i join with you?