How to Calculate Labour Efficiency Variance
Labour efficiency variance is a measure of the difference between actual hours worked and standard hours worked in a production process. It is an important metric for any organisation that wants to improve productivity and reduce costs. In this article, we will break down the process of calculating labour efficiency variance in simple steps.
Define Labour Efficiency Variance
Labour efficiency variance is a measure of the difference between actual hours worked and standard hours worked in a production process. It is calculated by subtracting the standard hours from actual hours, and then multiplying the result by the standard rate per hour.
Gather Data
To calculate labour efficiency variance, you will need the following data: Actual hours worked, Standard hours worked, and Standard rate per hour. You can obtain this data from your time and attendance system, payroll system, or production reports.
Calculate Actual Hours Worked
The first step in calculating labour efficiency variance is to determine the actual hours worked in the production process. This can be obtained from your time and attendance system or production reports. For example, if your production process took 8 hours to complete and you had 10 workers each working 1 hour, your actual hours worked would be 10 x 1 = 10 hours.
Calculate Standard Hours Worked
The next step is to calculate the standard hours worked in the production process. This can be obtained from your production plan or budget. For example, if your production plan called for a production process to take 8 hours and you had 10 workers each expected to work 1 hour, your standard hours worked would be 10 x 1 = 10 hours.
Calculate Standard Rate per Hour
The standard rate per hour is the cost of labour per hour that you have budgeted for the production process. This can be obtained from your budget or accounting system. For example, if your budgeted labour cost for the production process was $20 per hour, your standard rate per hour would be $20.
Calculate Labour Efficiency Variance
Once you have gathered the necessary data, you can calculate labour efficiency variance. The formula for labour efficiency variance is: Labour Efficiency Variance = (Actual Hours Worked - Standard Hours Worked) x Standard Rate per Hour. For example, if your actual hours worked were 10 and your standard hours worked were 8, and your standard rate per hour was $20, your labour efficiency variance would be (10-8) x $20 = $40.
Analyse Results
After calculating labour efficiency variance, you will need to analyse the results. A positive labour efficiency variance indicates that your actual hours worked were less than your standard hours worked, which is a good thing. It means that your workers were more productive than expected. A negative labour efficiency variance indicates that your actual hours worked were more than your standard hours worked, which is a bad thing. It means that your workers were less productive than expected.
Identify Causes
If you have a negative labour efficiency variance, you will need to identify the causes. There may be a variety of reasons why your workers were less productive than expected, such as poor training, equipment breakdowns, or inefficient processes. By identifying the causes, you can take corrective action to improve productivity and reduce costs.
Take Action
Once you have identified the causes of a negative labour efficiency variance, you can take corrective action. This may involve providing additional training to your workers, repairing or replacing equipment, or redesigning processes to make them more efficient. By taking action, you can improve productivity and reduce costs, which will ultimately benefit your organisation.
Monitor Performance
After taking corrective action, you will need to monitor performance to ensure that the problems have been resolved. You can use labour efficiency variance as a key performance indicator to track your progress over time. By monitoring performance, you can identify opportunities for further improvement and ensure that your production processes are operating at optimal efficiency.
Conclusion
Calculating labour efficiency variance is an important part of managing a production process. By understanding the formula and taking corrective action when necessary, you can improve productivity, reduce costs, and ultimately benefit your organisation. Remember to monitor performance over time to ensure that your production processes are operating at optimal efficiency.
