{"id":112,"date":"2021-01-26T22:08:22","date_gmt":"2021-01-26T22:08:22","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=112"},"modified":"2021-05-13T00:02:31","modified_gmt":"2021-05-13T00:02:31","slug":"direct-labor-efficiency-variance","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/direct-labor-efficiency-variance\/","title":{"raw":"Direct Labor Efficiency Variance","rendered":"Direct Labor Efficiency Variance"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Compute the direct labor efficiency variance<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"alignright wp-image-1600\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13000120\/michaela-murphy-jlG41_nbXOk-unsplash-201x300.jpg\" alt=\"Tools on a wood bench\" width=\"350\" height=\"523\" \/>Usually, the company\u2019s engineering department sets the standard amount of direct labor-hours needed to complete a product. Engineers may base the direct labor-hours standard on time and motion studies or on bargaining with the employees\u2019 union. The <strong>Direct Labor Efficiency Variance<\/strong> occurs when employees use more or less than the standard amount of direct labor-hours to produce a product or complete a process. The direct labor efficiency variance is similar to the direct materials usage variance. In fact, the basic formula is the same, except we use actual direct labor-hours worked for Actual Quantity (AQ), standard direct labor-hours allowed for Standard Quantity (SQ), and the standard direct labor-hour rate per hour for Standard Cost (SC):\r\n\r\n<strong>Direct Labor Efficiency Variance = (AQ \u2013 SQ) x SC<\/strong>\r\n\r\nAlternatively, the Direct Materials Efficiency Variance could be calculated by multiplying Actual Quantity of raw materials (AQ) by the Standard Cost (SC) which would give the total cost of materials without regard to the price variance, and from that subtracting from that the product of the Standard Quantity of raw materials (AQ) and the Standard Cost (SC) which would give the total expected cost of materials if the conversion process used those materials exactly as expected.\r\n\r\n<strong>(AQ x SC) \u2013 (SQ x SC)<\/strong>\r\n\r\nFrom the payroll records of Boulevard Blanks, we find that line workers (production employees) put in 2,325 hours to make 1,620 bodies, and we see that the total cost of direct labor was $46,500. Based on the time standard of 1 \u00bd hours of labor per body, we expected labor hours to be 2,430 (1,620 bodies x 1.5 hours).\r\n\r\nWe can already see that we have a favorable variance. It took our workers 2,325 hours to do what we expected them to do in 2,430 hours. Let\u2019s do the calculation:\r\n\r\n<strong>(AQ \u2013 SQ) x SC<\/strong>\r\n\r\n(2,325 - 2,430) x $18.00 = -$1,890.00\r\n\r\nAlternatively:\r\n\r\n(AQ * SC) - (SQ * SC) = (2,325 * $18.00) - (2,430 * $18.00) = $41,850 - $43,740= -$1,890.00\r\n\r\nEven though the answer is a negative number, the variance is favorable because employees worked more efficiently, saving the organization money. Notice that using the standard labor rate of $18 per hour and assuming 1,620 bodies produced, we would have expected to pay $43,740 for labor, but because our employees were more efficient than expected, we only paid $41,850 (based on standard cost, not actual). What we have done is to isolate the cost savings from our employees working swiftly from the effects of paying them more or less than expected.\r\n\r\nTypically, the hours of labor employed are more likely to be under management\u2019s control than the rates that are paid. For this reason, labor efficiency variances are generally watched more closely than labor rate variances.\r\n\r\nLet\u2019s look at the two variances together:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\"><\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Favorable or Unfavorable<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td>Direct Labor Cost Variance<\/td>\r\n<td class=\"r\">$4,650.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>Direct Labor Efficiency Variance<\/td>\r\n<td class=\"r\">(1,890.00)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $ 2,760.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"highlight-red\">Unfavorable<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nAnd relate them back to the budget v. actual report:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>Boulevard Blanks\r\nPartial Income Statement\r\nFor the month ended July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Actual<\/th>\r\n<th class=\"r\" scope=\"col\">Budget<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales revenue<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable manufacturing costs<\/strong><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,080.00<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,880.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 46,500.00<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 43,740.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,395.00<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,944.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed manufacturing costs<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,485.00<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,365.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of Goods Manufactured and sold<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 99,460.00<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 97,929.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross Profit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 78,740.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 80,271.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nWe can double-check our work by reconciling the two variances to the overall variance in the budget:\r\n(actual quantity x actual cost) - (standard quantity x standard cost)\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\" style=\"height: 48px;\">\r\n<tbody>\r\n<tr style=\"height: 12px;\">\r\n<th class=\"r\" style=\"height: 12px; width: 48.5px;\" scope=\"col\">AQ<\/th>\r\n<th class=\"r\" style=\"height: 12px; width: 53.5px;\" scope=\"col\">AP<\/th>\r\n<th class=\"r\" style=\"height: 12px; width: 48.5px;\" scope=\"col\">SQ<\/th>\r\n<th class=\"r\" style=\"height: 12px; width: 86.5px;\" scope=\"col\">SC<\/th>\r\n<th class=\"r\" style=\"height: 12px; width: 210.5px;\" scope=\"col\">TOTAL VAR<\/th>\r\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Favorable or Unfavorable<\/span><\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr style=\"height: 12px;\">\r\n<td class=\"r\" style=\"height: 12px; width: 48.5px;\">\u00a0 \u00a0 2,325<\/td>\r\n<td class=\"r\" style=\"height: 12px; width: 53.5px;\">$\u00a020.00<\/td>\r\n<td style=\"height: 12px; width: 48.5px;\"><\/td>\r\n<td style=\"height: 12px; width: 86.5px;\"><\/td>\r\n<td class=\"r highlight\" style=\"height: 12px; width: 210.5px;\">$ 46,500.00<\/td>\r\n<td style=\"height: 12px; width: 165.5px;\">Actual total cost of labor<\/td>\r\n<\/tr>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"height: 12px; width: 48.5px;\"><\/td>\r\n<td style=\"height: 12px; width: 53.5px;\"><\/td>\r\n<td class=\"r\" style=\"height: 12px; width: 48.5px;\">\u00a0 \u00a0 2,430<\/td>\r\n<td class=\"r\" style=\"height: 12px; width: 86.5px;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $18.00<\/td>\r\n<td class=\"r highlight\" style=\"height: 12px; width: 210.5px;\">\u00a0 43,740.00<\/td>\r\n<td style=\"height: 12px; width: 165.5px;\">Budgeted total cost of labor<\/td>\r\n<\/tr>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"height: 12px; width: 48.5px;\"><\/td>\r\n<td style=\"height: 12px; width: 53.5px;\">Variance<\/td>\r\n<td style=\"height: 12px; width: 48.5px;\"><\/td>\r\n<td style=\"height: 12px; width: 86.5px;\"><\/td>\r\n<td class=\"r line-single line-double\" style=\"height: 12px; width: 210.5px;\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 $2,760.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"highlight-red\" style=\"height: 12px; width: 165.5px;\">Unfavorable<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nAgain, in reporting to our internal users, we would omit the parenthesis that we use in accounting to show a negative amount, since that may confuse non-financial managers who are relying on the report. We would show the variances as follows:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\"><\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Favorable or Unfavorable<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td>Direct Labor Cost Variance<\/td>\r\n<td class=\"r\">$4,650.00<\/td>\r\n<td class=\"highlight-red\">Unfavorable<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>Direct Labor Efficiency Variance<\/td>\r\n<td class=\"r\">1,890.00<\/td>\r\n<td class=\"highlight-green\">Favorable<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>Overall Direct Labor Variance<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $ 2,760.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"highlight-red\">Unfavorable<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThis shows that our labor costs are over budget, but that our employees are working faster than we expected them to. Remember that the direct labor efficiency variance in this case was negative, showing that if wages had been exactly as we predicted, our labor costs would have come in $1,890 under budget, making it a favorable variance, despite the fact it computes as a negative number.\r\n\r\nBefore we go on to explore the variances related to indirect costs (manufacturing overhead), check your understanding of the direct labor efficiency variance.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]217938[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Compute the direct labor efficiency variance<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-1600\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13000120\/michaela-murphy-jlG41_nbXOk-unsplash-201x300.jpg\" alt=\"Tools on a wood bench\" width=\"350\" height=\"523\" \/>Usually, the company\u2019s engineering department sets the standard amount of direct labor-hours needed to complete a product. Engineers may base the direct labor-hours standard on time and motion studies or on bargaining with the employees\u2019 union. The <strong>Direct Labor Efficiency Variance<\/strong> occurs when employees use more or less than the standard amount of direct labor-hours to produce a product or complete a process. The direct labor efficiency variance is similar to the direct materials usage variance. In fact, the basic formula is the same, except we use actual direct labor-hours worked for Actual Quantity (AQ), standard direct labor-hours allowed for Standard Quantity (SQ), and the standard direct labor-hour rate per hour for Standard Cost (SC):<\/p>\n<p><strong>Direct Labor Efficiency Variance = (AQ \u2013 SQ) x SC<\/strong><\/p>\n<p>Alternatively, the Direct Materials Efficiency Variance could be calculated by multiplying Actual Quantity of raw materials (AQ) by the Standard Cost (SC) which would give the total cost of materials without regard to the price variance, and from that subtracting from that the product of the Standard Quantity of raw materials (AQ) and the Standard Cost (SC) which would give the total expected cost of materials if the conversion process used those materials exactly as expected.<\/p>\n<p><strong>(AQ x SC) \u2013 (SQ x SC)<\/strong><\/p>\n<p>From the payroll records of Boulevard Blanks, we find that line workers (production employees) put in 2,325 hours to make 1,620 bodies, and we see that the total cost of direct labor was $46,500. Based on the time standard of 1 \u00bd hours of labor per body, we expected labor hours to be 2,430 (1,620 bodies x 1.5 hours).<\/p>\n<p>We can already see that we have a favorable variance. It took our workers 2,325 hours to do what we expected them to do in 2,430 hours. Let\u2019s do the calculation:<\/p>\n<p><strong>(AQ \u2013 SQ) x SC<\/strong><\/p>\n<p>(2,325 &#8211; 2,430) x $18.00 = -$1,890.00<\/p>\n<p>Alternatively:<\/p>\n<p>(AQ * SC) &#8211; (SQ * SC) = (2,325 * $18.00) &#8211; (2,430 * $18.00) = $41,850 &#8211; $43,740= -$1,890.00<\/p>\n<p>Even though the answer is a negative number, the variance is favorable because employees worked more efficiently, saving the organization money. Notice that using the standard labor rate of $18 per hour and assuming 1,620 bodies produced, we would have expected to pay $43,740 for labor, but because our employees were more efficient than expected, we only paid $41,850 (based on standard cost, not actual). What we have done is to isolate the cost savings from our employees working swiftly from the effects of paying them more or less than expected.<\/p>\n<p>Typically, the hours of labor employed are more likely to be under management\u2019s control than the rates that are paid. For this reason, labor efficiency variances are generally watched more closely than labor rate variances.<\/p>\n<p>Let\u2019s look at the two variances together:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\"><\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Favorable or Unfavorable<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><\/td>\n<td>Direct Labor Cost Variance<\/td>\n<td class=\"r\">$4,650.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>Direct Labor Efficiency Variance<\/td>\n<td class=\"r\">(1,890.00)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $ 2,760.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"highlight-red\">Unfavorable<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>And relate them back to the budget v. actual report:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>Boulevard Blanks<br \/>\nPartial Income Statement<br \/>\nFor the month ended July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Actual<\/th>\n<th class=\"r\" scope=\"col\">Budget<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales revenue<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 178,200.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable manufacturing costs<\/strong><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,080.00<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38,880.00<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor<\/td>\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 46,500.00<\/td>\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 43,740.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,395.00<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 1,944.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed manufacturing costs<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Allocated overhead<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,485.00<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 13,365.00<\/td>\n<\/tr>\n<tr>\n<td>Cost of Goods Manufactured and sold<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 99,460.00<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 97,929.00<\/td>\n<\/tr>\n<tr>\n<td>Gross Profit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 78,740.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 80,271.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>We can double-check our work by reconciling the two variances to the overall variance in the budget:<br \/>\n(actual quantity x actual cost) &#8211; (standard quantity x standard cost)<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\" style=\"height: 48px;\">\n<tbody>\n<tr style=\"height: 12px;\">\n<th class=\"r\" style=\"height: 12px; width: 48.5px;\" scope=\"col\">AQ<\/th>\n<th class=\"r\" style=\"height: 12px; width: 53.5px;\" scope=\"col\">AP<\/th>\n<th class=\"r\" style=\"height: 12px; width: 48.5px;\" scope=\"col\">SQ<\/th>\n<th class=\"r\" style=\"height: 12px; width: 86.5px;\" scope=\"col\">SC<\/th>\n<th class=\"r\" style=\"height: 12px; width: 210.5px;\" scope=\"col\">TOTAL VAR<\/th>\n<th class=\"r\" scope=\"col\"><span class=\"u-sr-only\">Favorable or Unfavorable<\/span><\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr style=\"height: 12px;\">\n<td class=\"r\" style=\"height: 12px; width: 48.5px;\">\u00a0 \u00a0 2,325<\/td>\n<td class=\"r\" style=\"height: 12px; width: 53.5px;\">$\u00a020.00<\/td>\n<td style=\"height: 12px; width: 48.5px;\"><\/td>\n<td style=\"height: 12px; width: 86.5px;\"><\/td>\n<td class=\"r highlight\" style=\"height: 12px; width: 210.5px;\">$ 46,500.00<\/td>\n<td style=\"height: 12px; width: 165.5px;\">Actual total cost of labor<\/td>\n<\/tr>\n<tr style=\"height: 12px;\">\n<td style=\"height: 12px; width: 48.5px;\"><\/td>\n<td style=\"height: 12px; width: 53.5px;\"><\/td>\n<td class=\"r\" style=\"height: 12px; width: 48.5px;\">\u00a0 \u00a0 2,430<\/td>\n<td class=\"r\" style=\"height: 12px; width: 86.5px;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $18.00<\/td>\n<td class=\"r highlight\" style=\"height: 12px; width: 210.5px;\">\u00a0 43,740.00<\/td>\n<td style=\"height: 12px; width: 165.5px;\">Budgeted total cost of labor<\/td>\n<\/tr>\n<tr style=\"height: 12px;\">\n<td style=\"height: 12px; width: 48.5px;\"><\/td>\n<td style=\"height: 12px; width: 53.5px;\">Variance<\/td>\n<td style=\"height: 12px; width: 48.5px;\"><\/td>\n<td style=\"height: 12px; width: 86.5px;\"><\/td>\n<td class=\"r line-single line-double\" style=\"height: 12px; width: 210.5px;\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 $2,760.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"highlight-red\" style=\"height: 12px; width: 165.5px;\">Unfavorable<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Again, in reporting to our internal users, we would omit the parenthesis that we use in accounting to show a negative amount, since that may confuse non-financial managers who are relying on the report. We would show the variances as follows:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\"><\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Favorable or Unfavorable<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><\/td>\n<td>Direct Labor Cost Variance<\/td>\n<td class=\"r\">$4,650.00<\/td>\n<td class=\"highlight-red\">Unfavorable<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>Direct Labor Efficiency Variance<\/td>\n<td class=\"r\">1,890.00<\/td>\n<td class=\"highlight-green\">Favorable<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>Overall Direct Labor Variance<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $ 2,760.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"highlight-red\">Unfavorable<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>This shows that our labor costs are over budget, but that our employees are working faster than we expected them to. Remember that the direct labor efficiency variance in this case was negative, showing that if wages had been exactly as we predicted, our labor costs would have come in $1,890 under budget, making it a favorable variance, despite the fact it computes as a negative number.<\/p>\n<p>Before we go on to explore the variances related to indirect costs (manufacturing overhead), check your understanding of the direct labor efficiency variance.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm217938\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217938&theme=oea&iframe_resize_id=ohm217938\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-112\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Direct Labor Efficiency Variance. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgie State University. <strong>Provided by<\/strong>: Endeavour International Corporation. <strong>Project<\/strong>: The Global Text Project. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Tools on a wood bench. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/jlG41_nbXOk\">https:\/\/unsplash.com\/photos\/jlG41_nbXOk<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Direct Labor Variance. <strong>Authored by<\/strong>: Education Unlocked. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/zNriZz-zCec\">https:\/\/youtu.be\/zNriZz-zCec<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":10,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Direct Labor Efficiency Variance\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. 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