Direct Labor Efficiency Variance

I know business is business and there are standardized ways of calculating and measuring your efficiency, profits, etc...

Today, I'll cover how to determine if your operations are efficient and how much they are costing you per production cycle.

Here is an introduction to Direct Labor Efficiency Variance:

Direct labor rate variance measures the productivity of labor time. No variance is more closely watched by management, since it is widely believed that increasing the productivity of direct labor time is vital to reducing costs. This variance is believed to closely reflect the productivity and its relation to overall costs of a company.

You can calculate the variance by multiplying actual worked hours by the standard rate of the particular company then subtract the result of the standard rate  x standard (expected) hours, so (ah x sr) – (sh – sr)

Let’s assume that I own a manufacturing company that produces simple product out of basic (raw) materials assembled in a line; we produce 6000 units of finished ship-ready units every 5,000 hours (my actual hours), the standard time to complete a unit is 2 hours and all the production line workers are paid $15.00 per hour.  We can calculate as follows:

 = (5,000 hrs x $15/hrly)  - ([6,000 units x 2 hrs sr] x $15.00)

= $75,000 – (12,000 Sh x $15)

= $75,000 – $180,000

= $105,000 favorable.

In this case the production capabilities or labor efficiency are favorable.

Good practices allow managers to promote favorable variances such as completing due diligence when forecasting and estimating budgets and system methods by analyzing trends that are non-related to employee caused situations. Being able to delegate properly what skill sets each employee has to better perform an assigned task which can have a domino effect of positive results if done right and obviously including in the budgeting and projections being able to stay on top of suppliers market conditions and relations because if their prices go up so will your costs to maintain that merchant, being able to foresee that can deter a huge headache due to revenue and market loss.

I hope it helps :) 

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