Usually, for direct labor rate, the human resource department of a company is held responsible because such department has the authority to determine and decide the labor rates and evaluates the variances for performance review of the human asset. Show In addition, the production department of an entity is held responsible for the direct labor efficiency variance because the labor force performs its assigned task in such a department, and the production department’s head analyzes their performance. Labor efficiency variance is calculated by comparing the actual hours worked with standard hours allowed, both at the standard labor rate. The standard hours allowed figure is determined by multiplying direct labor hours established or predetermined to produce a single unit by the number of units produced. For example, if standard time to produce one unit of a product is 2 hours and 10 units of product have been manufactured during the period than the standard time allows would be 20 hours (2 � 10). The units produced are the equivalent units of production for the labor cost being analyzed. Labor efficiency variance is also known as labor time variance and labor usage variance. Formula:Following formula is used to calculate labor efficiency variance. Labor efficiency variance = (Actual hours worked � Standard rate) - (Standard hours allowed � Standard rate) Example:Assume that 1,880 hours are worked at a rate of $6.50 per hour to produce 530 equivalent units of product. The standard labor rate per hour is $6.00 and standard time allowed to produce a unit of product is 3 hours. Required: Calculate direct labor efficiency variance. Solution:Time�Rate=AmountActual hours worked at standard rate1,880$6.00 standard$11,280Standard hours allowed at standard rate1,590$6.00 standard9,540290$1,740 unfav. The standard hours allowed is the result of multiplying 530 units of product by 3 standard hours per unit. The unfavorable labor efficiency variance of $1,740 is due to the use of 290 hours in excess of standard hours allowed. Causes of Unfavorable Labor Efficiency/Usage Variance:Possible causes of an unfavorable efficiency variance include poorly trained workers, poor quality materials, faulty equipment, and poor supervision. Another important reason of an unfavorable labor efficiency variance may be insufficient demand for company's products. Who is Responsible for the Labor Efficiency/Usage Variance?The manager in charge of production is generally considered responsible for labor efficiency variance. However, purchase manager could be held responsible if the acquisition of poor materials resulted in excessive labor processing time. If customers orders are insufficient to keep the workers busy, the work center manager has two options, either accept an unfavorable labor efficiency variance or build up inventories. The second option is opposite to the basic principle of just in time (JIT). Inventories with no immediate prospect of sale is a bad idea according to just in time approach. Inventories, particularly work in process inventory leads to high defect rate, obsolete goods, and generally inefficient operations. As a consequence, when the work force is basically fixed in the short term, managers must be cautious about how labor efficiency variances are used. Some managers advocate dispensing with labor efficiency variance entirely in such situations―at least for the purpose of motivating and controlling workers on the shop floor. This variance tells us how efficient the direct labor was in making the actual output that was produced by the direct labor. The direct labor efficiency variance compares the standard hours that it should have taken to make the actual output Vs. the actual hours it took and multiplies the difference in hours by the standard cost per direct labor hour. Here's an example with amounts. Let's assume the standard for direct labor is 3 hours per unit of output and the standard cost for an hour of direct labor is $10. Let's say the output for the period is 6,000 units and the actual direct labor hours were 18,400 hours and the labor earned $10.30 per hour. The standard direct labor cost for the actual output should have been 18,000 hours (6,000 units of output times 3 standard hours) at $10 per hour for a total of $180,000. The actual direct labor cost was $189,520 (18,400 hours at $10.30 per hour). This means a TOTAL (efficiency and rate) variance of $9,520. Some of that variance is due to the rate being $0.30 too much and some of that variance is due to the direct labor using too many hours—not being efficient. The direct labor efficiency variance focuses on the direct labor hours: 6,000 units of output should have taken 3 hours each for a total of 18,000 direct labor hours. The actual direct labor hours were 18,400 hours. This means there was an unfavorable direct labor efficiency variance of 400 hours times the standard rate of $10 for a total of $4,000. The direct labor rate variance is the $0.30 unfavorable variance in the hourly rate ($10.30 actual rate Vs. $10.00 standard rate) times the 18,400 actual hours for an unfavorable direct labor rate variance of $5,520. The combination of the unfavorable direct labor efficiency variance of $4,000 + the unfavorable direct labor rate variance of $5,520 is the total unfavorable direct labor variance of $9,520. Who is responsible for a labor efficiency variance?The labor efficiency variance generally is also the responsibility of the production managers and supervisors. 8-6 The materials price variance can be computed either when materials are purchased or when they are placed into production. It is better to compute the variance when materials are purchased.
Who is responsible for variance?Management is responsible for evaluation of variances. This task is an important part of effective control of an organization. When total actual costs differ from total standard costs, management must perform a more penetrating analysis to determine the root cause of the variances.
What causes efficiency variances?Causes of a Labor Efficiency Variance
The employees may not have received written work instructions. Mix. The standard assumes a certain mix of employees involving different skill levels, which does not match the actual staffing. Training.
What is a efficiency variance?Efficiency variance is the difference between the theoretical amount of inputs required to produce a unit of output and the actual number of inputs used to produce the unit of output.
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