The three columns that contain the amounts for AA, SA, and SS are multiplied down to give a total under each of the three columns. The total of the AA column is compared to the total of the SA column. The difference is labeled Labor Rate Variance. The total of the SA column is compared to the total of the SS column and the difference is labeled as Labor Efficiency Variance.

Favorable and Unfavorable

• If actual labor rate per hour exceeds allowed labor rate per hour, the variance = unfavorable labor rate variance

• If actual labor rate per hour is less than allowed labor rate per hour, the variance = favorable labor rate variance

• If actual labor hours used is less than allowed labor hours, the variance = favorable labor quantity/efficiency variance

• If actual labor hours used exceeds allowed labor hours, the variance = unfavorable labor quantity/efficiency variance

The descriptions below tell you what information is provided by the amounts calculated. In each comparison, if the left total exceeds the right total, the variance will be unfavorable. If the left total is less than the right total, the variance will be favorable. Don't confuse favorable and unfavorable with good and bad.

To determine the total labor variance, combine the labor rate variance with the labor efficiency variance.

Causes of Labor Variances

The standard labor rate established by a company is an average, usually pertaining to average quality workers. Newly hired workers will likely get paid less which creates a favorable labor rate variance. They will also work more slowly than more experienced workers creating an unfavorable labor efficiency variance. The opposite is true if a company employs highly skilled workers.

Responsibility for Labor Variances

Whose problem is it when a labor rate variance exists?  The production supervisor hires production workers and assigns each a wage rate. He is able to give them raises and terminate them if necessary. For this reason, if a labor rate exists, we inquire with the production supervisor to try to determine the variance cause.

Whose problem is it when a labor efficiency variance exists?  The production supervisor oversees the production workers and monitors the efficiency with which each of these workers works. For this reason, if a labor efficiency exists, we inquire with the production supervisor to try to determine the variance cause.

Example Problem

Bateh Company produces hot sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2012:

Calculate all three direct labor variances.

Solution

Set up the matrix and write the actual price and standard price amounts on the first line. The problem gives you the standard (S) price per hour of $12.00. The actual price for direct labor must be determined. You are given the total direct labor of $19,481, and the actual hours worked in the amount of 1,610. Because total hours worked time the rate per hour equals total wages, you can work backwards to get $12.10 per hour. 

Now write in the quantities in the second row. You are given the actual quantity for the first two columns. The last column is often referred to as the flexible budget column because the amount you will write in will calculate the amount on a flexible budget. Recall that flexible budget means the actual units produced are considered. The standard quantity allowed is 24 minutes or 24/60 = 0.40 hours for each finished goods unit produced. Since 4,400 were produced, you get 4,400 times 0.40 = 1,760 hours of direct labor allowed.

Now we need to multiply down and write the total below the underline for each of he three columns.

Take the difference between the first and second columns to get the labor price/rate variance. Since the left total is greater than the right total, the variance is unfavorable. Take the difference between the second and last columns to get the labor quantity/efficiency variance. Since the left total is less than the right total, the variance is favorable.