What is Labor Efficiency Variance?
Labor efficiency variance shows whether workers took more or fewer hours than the standard allows to complete the actual output. It isolates the productivity effect from any wage-rate effect, helping managers judge how efficiently labor was used.
Labor efficiency variance equals (Actual Hours worked − Standard Hours allowed) × Standard Rate. A positive result is unfavorable (more hours used than standard); a negative result is favorable.
- •Took more hours than the standard allows
- •Raises total labor cost
- •May signal poor training, equipment issues, or low morale
- •Investigate workflow and supervision
- •Took fewer hours than the standard allows
- •Lowers total labor cost
- •May signal strong training or process improvement
- •Confirm output quality was maintained
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Step-by-step worked examples
Standard hours allowed for a job is 500 hours at a standard rate of $15/hr. Actual hours worked were 520. Find the labor efficiency variance.
AH − SH = 520 − 500 = 20 hr LEV = 20 × $15 = $300 Since AH > SH, the variance is $300 Unfavorable
Standard hours allowed is 500 at $12/hr, but actual hours worked were only 450.
AH − SH = 450 − 500 = −50 hr LEV = −50 × $12 = −$600 Since AH < SH, the variance is $600 Favorable
A crew took 1,100 actual hours against 1,000 standard hours allowed, at a standard rate of $10/hr.
AH − SH = 1,100 − 1,000 = 100 hr LEV = 100 × $10 = $1,000 Since AH > SH, the variance is $1,000 Unfavorable
Flashcards
Quick quiz
Q1.Standard hours allowed is 400, actual hours worked is 380, standard rate is $20/hr. What is the labor efficiency variance?
Q2.Which rate is always used for the labor efficiency variance formula?
Q3.An unfavorable labor efficiency variance means the company…
Q4.Labor efficiency variance isolates which factor?
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Common mistakes
Using the actual rate instead of the standard rate in the formula. — Correct: Labor efficiency variance always uses the standard hourly rate, not the actual rate.
Comparing actual hours to a fixed budgeted hours figure. — Correct: Standard hours allowed must be the hours allowed for the actual output achieved, not a static budget.
Confusing labor efficiency variance with labor rate variance. — Correct: Efficiency variance is about hours worked (AH vs SH); rate variance is about pay per hour (AR vs SR).
Assuming a favorable efficiency variance always reflects good management. — Correct: Rushed work that skips quality steps can also produce a favorable variance — check output quality too.
FAQ
What is the formula for labor efficiency variance?
LEV = (Actual Hours worked − Standard Hours allowed) × Standard Rate.
How do you calculate labor efficiency variance?
Subtract the standard hours allowed for actual output from the actual hours worked, then multiply by the standard hourly rate.
What are examples of labor efficiency variance?
A crew taking 20 extra hours on a job due to equipment downtime ($300 unfavorable), or finishing 50 hours early thanks to a smoother workflow ($600 favorable).
What does an unfavorable labor efficiency variance mean?
It means workers took more hours than the standard allowed to produce the actual output, raising labor cost.