Cost Accounting

Direct Labour Efficiency Variance

What is Direct Labour Efficiency Variance?

The direct labour efficiency variance measures the difference between the actual quantity of direct labour hours used and the budgeted/standard quantity of direct labours hours used.

Formula = (Actual quantity of direct labour hours used - Budgeted/Standard quantity of direct labour hours) * Standard Labour Hour Rate

Unfavourable and Favourable Direct Labour Rate Variances

Favourable - the actual labour hours used is lower than the budgeted/standard labour hours used, resulting in a negative answer

Unfavourable - the actual labour hours used is higher than the budgeted/standard labour hours used, resulting in a positive answer.

Possible Reasons for Direct Labour Efficiency Variances

Favourable:
- The business employed more skilled and experience labour who were more productive, hence using less direct labour hours

Unfavourable:
- The business employed more junior and inexperienced employees who used more labour hours to produce goods and services
- The business's plant and equipment was unreliable, breaking down and requiring employees to take breaks or working more slowly, reducing the efficiency of the production line.

Worked Example: Direct Labour Efficiency Variance

Pens Production People Ltd. produce blue ballpoint pens. The company expects to use 250 hours of direct labour at $25.50 an hour. The company actually used 310 direct labour hours at $23.50 an hour.


Calculate the Direct Labour Efficiency Variance.

Formula = (Actual quantity of direct labour hours used - Budgeted/Standard quantity of direct labour hours) * Standard Labour Hour Rate

= (310-250) *$25.50

= $1530

The answer is positive, hence is unfavourable.

= $1530 Unfavourable.

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