The labor efficiency variance calculation presented previously shows that 18,900 in actual hours worked is lower than the 21,000 budgeted hours. Clearly, this is favorable since the actual hours worked was lower than the expected (budgeted) hours. The 21,000 standard hours are the hours allowed given actual production. For Jerry’s Ice Cream, the standard allows for 0.10 labor hours per unit of production.
Staffing Variances
The labor variance can be used in any part of a business, as long as there is some compensation expense to be compared to a standard amount. It can also include a range of expenses, beginning with just the base compensation paid, and potentially also including payroll taxes, bonuses, the cost of stock grants, and even benefits paid. Hence, variance arises due to the difference between actual time worked and the total hours that should have been worked.
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A favorable labor rate variance suggests cost efficient employment of direct labor by the organization. If the outcome is unfavorable, the actual costs related to labor were more than the expected (standard) costs. If the outcome is favorable, the actual costs related to labor are less than the expected (standard) costs. An unfavorable materials quantity variance occurred because the pounds of materials used were greater than the pounds expected to be used. This could occur if there were inefficiencies in production or the quality of the materials was such that more needed to be used to meet safety or other standards. Managers sometimes focus only on making numbers for the current period.
Direct Labor Time Variance
In either case, managers potentially can help other managers and the company overall by noticing particular problem areas or by sharing knowledge that can improve variances. Recall from Figure 10.1 that the standard rate for Jerry’s is$13 per direct labor hour and the standard https://www.bookkeeping-reviews.com/ direct labor hours is0.10 per unit. Figure 10.6 shows how to calculate the labor rateand efficiency variances given the actual results and standardsinformation. Review this figure carefully before moving on to thenext section where these calculations are explained in detail.
If we use more hours at the same rate of pay, it would be called a labor efficiency variance. Labor yield variance arises when there is a variation in actual output from standard. Since this measures the performance of workers, it may be caused by worker deficiencies or by poor production methods. Labor mix variance is the difference between the actual mix of labor and standard mix, caused by hiring or training costs.
- Actual costs may differ from standard costs for materials because the price paid for the materials and/or the quantity of materials used varied from the standard amounts management had set.
- If the standard quantity allowed had exceeded the quantity actually used, the materials usage variance would have been favorable.
- As a result of these cost cuts, United wasable to emerge from bankruptcy in 2006.
- An overview of these two types of labor efficiency variance is given below.
However, the expense of implementing new, more efficient equipment might be higher than repairing the current equipment. In the short term, it might be more economical to repair the outdated equipment, but in the long term, purchasing more efficient equipment would help the organization reach its goal of eco-friendly manufacturing. A manager needs to be cognizant of his or her organization’s goals when making decisions based on variance analysis. Since both the rate and efficiency variances are unfavorable, we would add them together to get the TOTAL labor variance.
Even with a higher direct labor cost per hour, our total direct labor cost went down! So as we discussed, we can analyze the variance for labor efficiency by using the standard cost variance analysis chart on 10.3. The actual hours used can differ from the abusive tax shelters and transactions standard hours because of improved efficiencies in production, carelessness or inefficiencies in production, or poor estimation when creating the standard usage. Another element this company and others must consider is a direct labor time variance.
