Fixed Overhead Efficiency Variance Formula, Calculation, Example

Measuring the efficiency of the labor department is as important as any other task. Output (_O) is in units, Times (_T) are in hrs, Rates (_R) are in monetary value per unit time and Costs (_C) are in monetary values. Direct Labor Mix Variance is defined as the difference between the exact amount of labor needed to manufacture a product and the actual amount of labor used for that product. If this cannot be done, then the standard number of hours required to produce an item is increased to more closely reflect the actual level of efficiency.

Figure 10.43 shows the connection between the direct labor rate variance and direct labor time variance to total direct labor variance. Labor efficiency variance equals the number of direct labor hours you budget for a period minus the actual hours your employees worked, times the standard hourly labor rate. The purpose of calculating the direct labor efficiency variance is to measure the performance of the production department in utilizing the abilities of the workers. A positive value of direct labor efficiency variance is obtained when the standard direct labor hours allowed exceeds the actual direct labor hours used.

Direct Materials Efficiency Variance

A labor variance is a type of cost variance that focuses on labor rates and hours. The comparison that is used to compute a labor variance compares standard versus actual rates and hours for workers, typically on a specific project. These computations are important because they help managers to analyze differences between planned and actual costs related to labor. If the actual hours worked are less than the standard hours at the actual production output level, the variance will be a favorable variance.

• All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
• Average acceleration is the object’s change in speed for a specific given time period.
• Calculate the labor rate variance, labor time variance, and total labor variance.
• A labor efficiency variance is defined as the total difference in cost between budgeted labor hours and the actual labor hours worked on a job.

Thus, the Total Variable Overhead Variance can be divided into a Variable Overhead Spending Variance and a Variable Overhead Efficiency Variance. Review the following graphic and notice that more is spent on actual variable factory overhead than is applied based on standard rates. This scenario produces unfavorable variances (also known as “underapplied overhead” since not all that is spent is applied to production). As monies are spent on overhead (wages, utilization of supplies, etc.), the cost (xx) is transferred to the Factory Overhead account. As production occurs, overhead is applied/transferred to Work in Process (yyy). When more is spent than applied, the balance (zz) is transferred to variance accounts representing the unfavorable outcome.

Variable Factory Overhead Variances

If there is no difference between the actual hours worked and the standard hours, the outcome will be zero, and no variance exists. The direct labor variance measures how efficiently the company uses labor as well as how effective it is at pricing labor. There are two components https://turbo-tax.org/self-employed-2021/ to a labor variance, the direct labor rate variance and the direct labor time variance. Jerry (president and owner), Tom (sales manager), Lynn (production manager), and Michelle (treasurer and controller) were at the meeting described at the opening of this chapter.

It is that portion of the labour cost variance which arises due to the difference between the standard rate specified and the actual rate paid. Because Band made 1,000 cases of books this year, employees should have worked 4,000 hours (1,000 cases x 4 hours per case). However, employees actually worked 3,600 hours, for which they were paid an average of $13 per hour. Labor rate variance is the difference between the expected cost of labor and the actual cost of labor.

Nature of Variance

Standard costs provide information that is useful in performance evaluation. Standard costs are compared to actual costs, and mathematical deviations between the two are termed variances. Favorable variances result when actual costs are less than standard costs, and vice versa. The following illustration is intended to demonstrate the very basic relationship between actual cost and standard cost. SQ and SP refer to the “standard” quantity and price that was anticipated. Labor variances focus on both rates and hours, also called efficiency or quantity.

If the actual rate of pay per hour is less than the standard rate of pay per hour, the variance will be a favorable variance. If, however, the actual rate of pay per hour is greater than the standard rate of pay per hour, the variance will be unfavorable. A labor variance that is a positive number is favorable and can result in profit that is higher than expected. A favorable variance occurs when your actual direct labor costs are less than your standard, or budgeted, costs, reports Accounting Coach. The direct labor variance is the difference between the actual labor hours used for production and the standard labor hours allowed for production on the standard labor hour rate.

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Calculate the labor rate variance, labor time variance, and total labor variance. Labor price variance and labor efficiency variance might be favorable or unfavorable for various reasons. For example, you might use newer workers who receive lower pay than usual, which would create a favorable labor price variance and could increase your expected profit. These workers might have insufficient training and might require more hours to complete a job.

Michelle was asked to find out why direct labor and direct materials costs were higher than budgeted, even after factoring in the 5 percent increase in sales over the initial budget. Lynn was surprised to learn that direct labor and direct materials costs were so high, particularly since actual materials used and actual direct labor hours worked were below budget. However, this result of $400 of favorable variable overhead efficiency variance doesn’t mean that the company ABC’s total variable overhead variance is favorable. The company ABC needs to also calculate variable overhead spending variance in order to determine the total variable overhead variance as it is the result of the combination of the two variances. In other words, the variable overhead variance is broken down into the variable overhead efficiency variance and the variable overhead spending variance. If the result of the calculation is positive, the variance is favorable; on the other hand, if the result is negative, the variance is unfavorable.