Labor efficiency variance can also be referred to as the quantity variance for direct labor. It is computed as the difference between the standard labor hours for actual production and the actual labor hours worked during a period and multiplied by the standard wage rate per hour. It is expressed as:

(SH – AH) * SR

Where:
SH is the Standard Hours
AH is the Actual Hours
SR is the Standard Rate

If the actual hours taken for production are more than the standard hours required, we have an adverse (A) variance. In case of the opposite scenario, the variance is called favorable (F).

The possible reasons for labor efficiency variance include usage of different grades of labor for production, inferior quality of materials, failure to maintain machinery in proper condition, introduction of new equipment and tools, etc.

A production of one unit requires 3 hours of labor. A company produced 10,000 units during a period and utilized 29,500 hours of labor for the same. The hourly labor rate is $3. The labor efficiency variance is a favorable $1,500 ((30,000 – 29,500)*$3)

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