Lessons · Accounting · labour rate and efficiency variances
Labour: was it the rate, or the hours
The same split, with the same shape. The rate variance is the difference in hourly rate times the hours actually worked. The efficiency variance is the difference between hours worked and hours allowed for the output achieved, valued at the standard rate.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
These two are frequently connected, and that is the thing worth seeing. Putting a more senior person on a job raises the rate variance and often lowers the efficiency variance, and whether that was a good decision is answered by the two together, not by either alone.
How to think about it
Exactly as for materials. Re-base the standard on actual output first, then rate, then efficiency, then read them together.
Worked example
Standard: 2 hours a unit at 18.00. Made 2,000 units, so 4,000 hours allowedRe-based on actual output.
Actually worked 4,150 hours at 18.40What happened.
Rate = (18.40 − 18.00) × 4,150 = 1,660, adversePaid above standard.
Efficiency = (4,150 − 4,000) × 18.00 = 2,700, adverseAnd took longer as well, so this one is not a trade-off, it is two problems.
Your turn
Worked 4,150 hours, allowed 4,000, standard rate 18.00. Write the efficiency variance line.
Efficiency = (4,150 − 4,000) × = 2,700
Solve one, graded on the server
The trap
Valuing the efficiency variance at the ACTUAL rate. It has to be at standard, or the effect of the rate is counted twice and the two variances no longer add to the total.