Labor Efficiency Variance
In order to understand the labor efficiency variance properly, you will have to understand the concept and workings of standard costing first. Variance is simply a method that is used in the bigger picture of the standard costing.
Standard costing is a method that is used to analyze the difference in the standard cost and the actual costs of the company. This method of analyzing the cost difference is known as variance analysis. Variance analysis is a necessary tool that determines the difference in the costs that the business has estimated will incur to the cost that actually incurs in the manufacturing, labor and other operations.
The labor variances in the variance analysis are of two types:
- Labor rate variance
- Labor efficiency variance
In the labor variance, two comparisons are being made at the same time. One comparison is that of the standard costs of labor with the actual costs of labor. The second analysis is of actual hours of labor with the standard hours. This second analysis is called labor efficiency variance. It is very necessary for the companies to perform this variance analysis too add management and understand the costs incurred on the labor and the efficiency of the labor in a better way.
The labor efficiency can be determined by this variance by calculating the number of hours that were actually worked, and the number of the units produced in those worked hours. This analysis can help the management in cutting back the work force if necessary or increase the production by offering incentives. The management can make its result favorable in a number of ways, but the key to that change is the need to conduct the labor variance analysis.
Once the analysis is conducted, it is time for determining the results. If the efficiency variance of the labor is favorable, it will mean that the labor is working in the way it should and the hours used by labor in the production are the hours that are standardized by the company in the budget.
If the results of the variance were adverse, it would mean that the labor is taking more hours in the production than necessary, and this will result in the high labor rates paid and idle hours.