Labor Efficiency Variance
The labor efficiency variance assesses the capacity to use labor in accordance with expectations. The variance can be used to draw attention to the portions of the production process that are taking longer than anticipated to finish.
If the outcome of the variance is unfavorable, industrial engineers will investigate the underlying process to see if it can be enhanced to reduce the amount of production hours required. A few modifications that might be made are:
- Streamlining the product's design to speed up assembly
- Decreased overall scrap yield from the process
- The level of automation rising
- Changing the process
If this is not possible, the typical amount of time needed to make a good is increased to better reflect the degree of productivity.
Challenges Of Labor Efficiency Variance
The standard number of hours is the industrial engineers' best guess as to the ideal rate at which the production team can produce things. Based on estimates about the setup time for a production run, the availability of materials and machine capacity, employee skill levels, the length of a production run, and other factors, this number can vary significantly. Thus, it is extremely challenging to establish a standard that you can effectively compare to actual results due to the large number of factors involved.
How to Calculate Labor Efficiency Variance
The difference between the actual and anticipated labor hours used to produce the item, multiplied by the standard hourly rate, is used to calculate this variance. The following is how the labor efficiency variance is calculated:
(Actual hours - Standard hours) x Standard rate = Labor efficiency variance
A decrease in labor productivity is indicated by a negative variance, whereas an increase is shown by a positive variance.
Example of Labor Efficiency Variance
Based on a number of assumptions about the productivity of Hodgson's production staff, the availability of materials, capacity availability, and other factors, the industrial engineers of Hodgson Industrial Design determine that the typical amount of time needed to produce a green widget should be 30 minutes when developing its annual budget. Hodgson had to pay production personnel even when there was no material to work on during the month due to the lack of widget materials, which led to an average manufacturing time per unit of 45 minutes. In one month, the business produced 1,000 widgets. Given that labor costs are typically $20 per hour, the labor efficiency variance is calculated as follows::
(750 Actual hours-500 Standard hours) x $20 Standard rate = $5,000 Labor efficiency variance
Causes of Labor Efficiency Variance
A labor efficiency variance could have a variety of causes. For instance:
- Instructions - It's possible that the workers were not given written work instructions.
- Mix - The standard bases its assumptions on a mix of workers with varying skill levels, which does not correspond to the real staffing.
- Training - The criteria can be predicated on the notion that workers haven't obtained at least a certain amount of training.
- Configuration of a workstation - It's possible that a work center has been rearranged since the standard was written, making it outdated.
Only recurring processes benefit from tracking this variance; in cases when commodities are produced infrequently or over a lengthy period of time, tracking this variance serves little purpose.