Lion Company’s direct labor costs for the month of January were as follows: Actual total direct labor-hours 20,000 Standard total direct labor-hours 21,000 Direct labor rate variance—unfavorable $3,000 Total direct labor cost $126,000 What was Lion’s direct labor efficiency variance?

The direct labor efficiency variance is used to measure the efficiency of labor in doing a job. The labor efficiency variance is calculated as a product of the difference in standard hours for actual output and actual hours to the standard rate.

The formula to calculate direct labor efficiency variance is as follows:

[tex]\rm Direct \:labor \:efficiency\: variance = (Standard \:hours - Actual\:hours) \times Standard \:rate[/tex]

Given:

Actual direct labor-hours is 20,000

Standard direct labor-hours is 21,000

Direct labor rate varianceis -$3,000

Total direct labor cost is $126,000

To calculate the direct labor efficiency variance, we need to find the standard rate. The standard rate can be calculated as follows:

[tex]\begin{aligned} \rm Labor\:rate\:variance &= Standard\:cost-Actual\:cost\\\\\rm Labor\:rate\:variance &= \rm (Standard \:rate\times Actual \:hours) - ( Actual\:rate \times Actual \:hours) \\\\-3,000 &= (Standard \:rate\times 20,000) - 126,000\\\\-3,000+126,000 &=\rm (Standard \:rate\times 20,000) \\\\123,000 &= \rm (Standard \:rate\times 20,000) \\\\\rm Standard \:rate&= \dfrac{123,000}{20,000}\\\\\rm Standard \:rate &= 6.15\end[/tex]

Therefore direct labor efficiency variance will be:

[tex]\rm Direct \:labor \:efficiency\: variance = (Standard \:hours - Actual\:hours) \times Standard \:rate\\\\\rm Direct \:labor \:efficiency\: variance = (21,000 - 20,000) \times6.15\\\\\rm Direct \:labor \:efficiency\: variance = \$6,150(Favorable)[/tex]

Therefore the direct labor efficiency variance is $6,150 favorable.

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