What is Labor Efficiency Variance?
Labor efficiency variance is the difference between the actual hours of direct labour used in producing the actual output and the standard hours that should have been used, valued at the standard labour rate.
How It Works
- Determine the standard labour hours per unit and the standard wage rate.
- Calculate standard hours allowed = standard hours per unit × actual units produced.
- Capture the actual hours worked from the time and attendance system.
- Variance = (actual hours − standard hours allowed) × standard rate.
- Investigate causes — training, machine downtime, materials quality.
Saudi Context
Saudi manufacturers using standard costing track labour efficiency variances monthly to manage productivity and cost competitiveness, especially given the rising Saudization thresholds set by the Ministry of Human Resources and Social Development.
Example
Standard 2 hours per unit at SAR 30/hour. Actual production: 1,000 units in 2,200 hours. Variance = (2,200 − 2,000) × 30 = SAR 6,000 unfavourable.