What is variance analysis?

Variance analysis is a budgeting tool used to evaluate performance in controlling expenses such as direct material costs or quantities and labour rates or hours.

Variance simply means the difference between the actual and the budgeted price of an expense or the quantity used for an expense.

What is Direct Labour Efficiency Variance?

Direct Labour Efficiency Variance measures the difference between the actual number of labour hours used and the budgeted/expected number of labour hours.

Formula for Direct Labour Efficiency Variance

DLEV = (Actual Number of Labour Hours Used - Budgeted Quantity of Labour Hours Used) * Standard Rate of Direct Labour

Remember: It is the standard rate of direct labour that is applied to the quantity difference - not the actual rate.

(Note: You do not need to remember this as it is on your formula sheet)

Unfavourable and Favourable Direct Labour Efficiency Variance

• Favourable - when the actual number of hours used is lower than the budgeted number of hours which will result in a negative answer

• Unfavourable - when the actual number of hours used is higher than the budgeted number of hours which will result in a positive answer

Possible Explanations of Direct Labour Efficiency Variance

Favourable

• The business has more experienced labour who can complete the task quicker.

• The business has installed more efficient production machines enabling fewer labour hours required.

Unfavourable

• The business has less experienced labour resulting in more time per product/service.

• Faulty machinery produced a number of instances where labour cannot work or work at a lower speed.

Worked Example Question

Trigg Pizza is a local pizza shop on the coastline of Perth. Typically they require 1,500 hours over the summer at a rate of $20/hr. However, Trigg Pizza installed a new automated woodfire pizza oven, enabling it to reduce the number of hours required to 1,000 hours over the summer. However, the new equipment required more expertise, leading to a higher wage of $22/hr.

Q: Direct Labour Efficiency Variance.

Solution:

= (Actual Number of Labour Hours Used - Budgeted Quantity of Labour Hours Used) * Standard Rate of Direct Labour

= (1,000 hours - 1,500 hours) * $20/hr

(-500 hours) * $20/hr

= -$10,000 is negative, hence the variance is favourable.

= $10,000 favourable