Cost Accounting and Cost Management

What is Labour Efficiency Variance? Meaning and Example

Labour Efficiency Variance is also known as Labour Time Variance. It is that portion of the Labour Cost Variance which arises due to the difference between the standard labour hours specified and the actual labour hours spent.

Labour Efficiency Variance

Usually, the company’s engineering department sets the standard amount of direct labour hours needed to complete a product. Engineers may base the direct labour-hours standard on time and motion studies or on bargaining with the employees’ union.

The labour efficiency variance (LEV) occurs when employees use more or less than the standard amount of direct labour hours to produce a product or complete a process. The labour efficiency variance is similar to the materials usage variance.

To compute the labour efficiency variance (LEV), multiply the difference between the actual direct labour hours worked (AH) and the standard direct labour hours allowed (SH) by the standard direct labour-hour rate per hour (SR):

Labour efficiency variance=Actual hours worked –Standard hours allowed ×Standard rate

Example of Labour Efficiency Variance Calculation

To illustrate, assume that the 22,200 hours of direct labour-hours worked by Beta Company employees resulted in 11,000 units of production. Assume these units have a standard direct labour hour of 22,000 hours (11,000 units at a 2-hour unit). Since the standard direct labour rate is USD 10 per hour, the labour efficiency variance is USD 2,000, computed as follows:

Labor efficiency variance= Actual hours worked –Standard hours allowed ×Standard rate

= (22,200 – 20,000)×USD10
= 200 X USD10
= USD 2,000 (unfavorable)

The variance is unfavourable since more hours were required to complete the period’s production than the standard number of hours. If the reverse were true, the variance would be favourable.

Conclusion

The labour efficiency variance is the difference between the actual number of direct labour hours worked and budgeted direct labour hours that should have been worked based on the standards. Poor supervision, poor working conditions, and defective materials are some of the reasons behind labour efficiency variance.

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