direct labor efficiency variance

Definition

The difference between the number of hours worked per unit and the number of hours budgeted to be worked per unit, valued at a specific wage rate. For example, consider a company that produces microwaves and has a standard wage rate of $20/hour. It budgeted 1,000 hours of labor to produce 500 microwaves, which would result in labor costs of $20,000 (1,000 hours x $20/hour). If the actual number of hours used to manufacture 500 microwaves was 900, the company would have spent $18,000 (900 hours x $20/hour). The hour variance was 100. This represents cost savings of $2,000 (100 hours x $20/hour). If employees experience idle time (not producing), this time is not factored in to the direct labor efficiency variance.