Direct Labour Efficiency Variance

Definition§

In a standard costing system, Direct Labour Efficiency Variance measures the efficiency of labour employed on production compared to preset standards. It reflects the difference arising between the actual hours worked and the standard hours allowed for the actual production output, evaluated at the standard direct labour rate. This variance indicates whether the labour force was more or less efficient than planned, influencing the overall profitability and cost control.

Formula§

The formula for Direct Labour Efficiency Variance is:

$$\text{Direct Labour Efficiency Variance} = (\text{Standard Hours} - \text{Actual Hours}) \times \text{Standard Rate}$$

• Standard Hours (SH): The estimated hours required to produce the actual output.
• Actual Hours (AH): The actual hours worked.
• Standard Rate (SR): The predetermined direct labour rate per hour.

Examples§

1. Positive (Favourable) Variance:

   • Standard Hours for actual output: 500 hours
   • Actual Hours worked: 480 hours
   • Standard Labour Rate: $20/hour

   \[ \text{Direct Labour Efficiency Variance} = (500 - 480) \times 20 = 20 \times 20 = $400 \text{ Favourable} \]

2. Negative (Adverse) Variance:

   • Standard Hours for actual output: 500 hours
   • Actual Hours worked: 520 hours
   • Standard Labour Rate: $20/hour

   \[ \text{Direct Labour Efficiency Variance} = (500 - 520) \times 20 = (-20) \times 20 = -$400 \text{ Adverse} \]

Frequently Asked Questions (FAQs)§

What causes Direct Labour Efficiency Variance?§

Direct Labour Efficiency Variance can be caused by a variety of factors:

• Labour skill and productivity levels
• Quality and efficiency of production processes
• Adequacy of employee training and supervision
• Workforce morale and motivation
• Machine downtime or inefficiencies

Why is Direct Labour Efficiency Variance important?§

This variance is critical for controlling costs and improving productivity. It helps managers identify areas where labour performance deviates from the standard and take corrective actions. It also impacts budgeting and financial planning by highlighting discrepancies between expected and actual labour costs.

How can Direct Labour Efficiency Variance be improved?§

Improvement can be achieved through:

• Enhanced worker training and more effective supervision
• Streamlining production processes and reducing downtime
• Motivating employees through performance incentives
• Investing in better technology and equipment

Related Terms§

Standard Costing:§

An accounting method that uses standard costs to appraise performance by comparing them with actual costs.

Variance:§

The difference between planned, budgeted or standard cost and actual cost.

Direct Labour Total Cost Variance:§

The cumulative variance arising from the difference between actual direct labour cost and standard direct labour cost, including efficiency and rate variances.

Standard Direct Labour Rate:§

The predetermined rate per hour for direct labour set in the budget.

Online Resources§

1. Investopedia – Standard Costing
2. Accounting Coach – Variances

Suggested Books§

1. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren
2. “Accounting for Decision Making and Control” by Jerold Zimmerman
3. “Managerial Accounting” by James Jiambalvo

Accounting Basics: “Direct Labour Efficiency Variance” Fundamentals Quiz§

Thank you for delving into the essential aspects of Direct Labour Efficiency Variance. Keep pushing forward in your accounting studies and exploring the depths of cost analysis and control!