Efficiency Variance

Posted in Finance, Accounting and Economics Terms, Total Reads: 320
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Definition: Efficiency Variance

It is simply the difference between the expected standard cost of production of a particular thing and the actual cost incurred in producing that product.

 

Formula:

 

Efficiency Variance = Standard cost – Actual cost

 

Efficiency Variance = (Standard hours – Actual hours) * per hour cost.

 

Efficiency variance is very an important calculation to check the efficiency of a manufacturing unit. Say, you are expecting to make a product for some amount i.e. you are expecting that the cost of production is something. Now, the decisions to sell it or some other decision will be taken according to the expected price. If the actual cost is more that of expected or standard cost then this is a cause of concern.

 

Example

Standard Rate Per Hour of Direct Labor

$ 18

Standard Direct Labor Hours Required Per Unit

0.2

Actual Units Produced During the Period

620

Actual Direct Labor Hours Used During the Period

130

 

Solution

 

Actual Units Produced

620

× Standard Direct Labor Hours Per Unit

0.2

Standard Direct Labor Hours Allowed

124

 

Standard Direct Labor Hours Allowed

124

− Actual Direct Labor Hours Used

130

Difference

− 6

× Standard Direct Labor Rate

$ 18

Direct Labor Efficiency Variance

− $ 108

 

Since the direct labor efficiency variance is negative, it is unfavourable.


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