Direct Labor Efficiency Variance

You are on the page where direct labor efficiency variance (DLEV) is broken down in the simplest of terms. 

This means:

You’ll find it easy to understand this post.

 

Now, off we go:

Direct labor efficiency is one of the three aspects of labor cost variance which are: direct labor rate variance, idle time variance, and direct labor efficiency variance.

DLE variance simply refers to the measure of the difference between the standard labor hours and the actual labor hours spent on production at a standard labor hourly rate.

In simple terms, DLEV seeks to compare the standard time for getting a job done against time spent doing the job in real life.

And just like other variances, direct labor efficiency variance has a mathematical expression, find it below:

 

Direct labor efficiency variance = Standard hourly rate x (Standard hours allowed for production – Actual hours worked)

 

Just before we bring forth an example, it is appurtenant to understand that the results obtained from solving questions on this topic are interpreted as either favorable or adverse.

In the same vein as direct labor rate variance, the result is favorable when standard hours are greater than the actual hours expended. It’ll be adverse if it is the other way round.

 

Worked Example

An indigenous company in Benue state is engaged in the production of ignition for automobile manufacturers in the country. 

The company engages the service of labor for processing the raw materials into the ignition key. From the estimate provided by the entity’s accounting manager, 4,000 hours would be needed for processing the raw materials into their final form.  

However, the laborers spent 4,500 hours doing this job. The accountant estimated the standard cost to be $50/ you are required to determine the DLEV as an intern in the company.

 

Solution

Using the formula;

Standard hourly rate x (Standard hours allowed for production – Actual hours worked)

$50 x (4,000 – 4,500) = $25,000 Adverse.

This means many hours are being spent over and above the standard time set by the management. Further analysis shows that the company would regularly spend more to produce the same quantity of products. If such instances are not corrected, it spells doom to the going concern of any business in such a situation.

 

Advantages

1. This variance aids the management of manufacturing entities in decision-making and budgeting.
2. It helps in planning the quality and quantity of labor to hire.
3. DLEV may cause the direct laborers to believe more in their own abilities once they achieve the set goals.
4. DLE variance provides insight into how efficiency can  be improved
5. If an entity can lower the actual hours spent on producing an output below the standard time allowed, such a company would enjoy considerable cost savings.

 

Limitations

1. It may impose unnecessary pressure on the staff. This may cause the laborers to lose motivation for work.
2. DLEV may lead to insubordination by staff especially when they are not promised any bonuses for achieving the target set.

 

Just before you go start treating self-practice questions:

Watch this video by Edspira for a visual demonstration of how to solve direct labor efficiency variance using this exact process I have shown you in this article.