Question

The following labor standards have been established for a particular product:

Standard labor-hours per unit of output		8.5	hours
Standard labor rate	$	12.30	per hour

The following data pertain to operations concerning the product for the last month:

Actual hours worked		6,300	hours
Actual total labor cost	$	74,970
Actual output		800	units

What is the labor efficiency variance for the month?

Answer 1

The labor efficiency variance measures the ability to utilize labor in accordance with expectations. The variance is useful for spotlighting those areas in the production process that are using more labor hours than anticipated. This variance is calculated as the difference between the actual labor hours used to produce an item and the standard amount that should have been used, multiplied by the standard labor rate

The formula for the labor efficiency variance is:

(Actual hours - Standard hours) x Standard rate = Labor efficiency variance

.

AH- Actual Hours

SH-Standard Hours for Actual Output

AR- Actual Rate

SR-Standard Rate

Given

AH- Actual Hours=6300 hours

SH-Standard Hours for Actual Output=

For one output 8.5 hrs are required

For Actual output of 800 units =standard hours =800*8.5=6800 hours

AR- Actual Rate=Actual labor cost/Actual labor hours=$74970/6300=$11.9per hour

SR-Standard Rate=$12.30 per hour

The labor efficiency variance =

(Actual hours - Standard hours) x Standard rate

(6300-6800)*$12.3

=$61500 favorable

It is favorable variance since actual hours spent are less than standard hours resulting from increased efficiency of labour

An unfavorable variance means that labor efficiency has worsened, and a favorable variance means that labor efficiency has increased

Therefore , Labor Efficiency for the month =$61500 favorable