The difference between the number of hours worked
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
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.