Labour Efficiency Variance Formula

Labour Efficiency Variance Formula

Labour efficiency variance formula is given below. Labour efficiency formula concept has been explained with an example below;

Labour Efficiency Variance Formula =(Standard Hours-Actual Hours)x(Standard Rate)

Labour Efficiency Variance Formula Example

Number of Chairs to be produced or make = 1200

 Labour hour rate Per Chair is= $ 8

Standard Labour or Expected hour per Chair = 6 Hr

Labour Hour consumed = 6000

Calculate Labour Efficiency Variance

Solution

Standard Hours = 1200 x 6 = 7200 hours

Labour Efficiency Variance = (Standard hours –Actual Hours) x (Standard Rate)

= (7200-6000) x 8

= (1200 x 8)

= 9600 (Favorable Variance)

Significance of Labour Efficiency Variance

Labour efficiency variance is calculated to show the labour performance or labour efficiency. The difference between standard hour required for an activity and actual hours taken by that project or activity is measured at standard rate. Labour efficiency ratio may be either is favorable or unfavorable.

Favorable and unfavorable Efficiency Variance

If actual hours are less than standard hour, then this is favorable labour efficiency variance case, otherwise it would be unfavorable labour variance case.Favorable and unfavorable efficiency variance may be mathematically or logically expressed as under;

Actual Labour Hours> Standard Labour hour = unfavorable Labour Variance

Actual Labour Hours < Standard Labour hour = Favorable Labour Variance

Reasons for Favorable Efficiency Variance

Reasons for favorable efficiency variance include use of skilled labour, use of advanced technology, premium quality material, and performance based reward structure for the employees.

Reasons for unfavorable Efficiency Variance

Reasons for unfavorable Labour efficiency variance include use of unskilled labour, use of poor quality material, and use of outdated machinery and lack of performance based structure.

Other Related Formulas

• Material Price Variance Formula
• Labour Efficiency Variance Formula 
• Labour Rate Variance Formula
• Material Price Variance Formula