[Question] Labour Efficiency Calculation

[speed_demon]

Hi All,

My fellow engineers and I are debating the right way to calculate the Direct Labour Efficiency Variance for the following problem. I think we're thinking about it too complicatedly.

I've over simplified the actual problem for the purpose of easy discussion as follows:

Calculate the total Direct Labour Efficiency Variance:

Standard Time to Complete Job: 17 Weeks
Actual Time to Complete Job: 18 Weeks

Standard Engineers Count: 114
Standard Weekly Rate: R750
Actual Engineers Count: 108
Actual Weekly Rate: R825

[adrianh]

94%

[CLIVE-TRIANGLE]

Direct labour efficiency variance = (actual time - standard time) x standard cost

So in your example it is R750 unfavourable.

I'm not sure what "engineer count" means

[adrianh]

Engineers Cost Weeks Total Cost
114 R 750.00 17 R 1 453 500.00
108 R 825.00 17 R 1 514 700.00
Projected cost R 2 968 200.00

114 R 750.00 18 R 1 539 000.00
108 R 825.00 18 R 1 603 800.00 ( Projected / Actual ) * 100
Actual cost R 3 142 800.00 94%

...my 20c worth!

[Houses4Rent]

Standard 17 114 R750 R 1,453,500
Actual 18 108 R825 R 1,603,800

R 1,453,500 divided by R 1,603,800 90.6%

[speed_demon]

Direct labour efficiency variance = (actual time - standard time) x standard cost

So in your example it is R750 unfavourable.

I'm not sure what "engineer count" means

It refers to the number of employees. So the Actual Engineers employed was 108. Standard was 114.

[adrianh]

My head aches!

[sterne.law@gmail.com]

I agree with Houses.
Calculate actual
Calculate standard
I differ on the variance percent, but purely on the perspective from which way the ratio is calculated.
I take the variance in rands (150 300) divided into the standard.
The difference is then 10, 3 percent

[CLIVE-TRIANGLE]

It refers to the number of employees. So the Actual Engineers employed was 108. Standard was 114.

Oh ok. The more accurate formula, that takes account of any stratification, is (Actual Time x Standard Rate) - (Standard Time X Standard Rate)
So, if I understand the data correctly, it is:
(18 x 108 x 750) - (17 x 114 x 750) = 4,500 unfavourable

Actual rate is ignored because it is an efficiency variance that is being determined.

[Houses4Rent]

The difference is then 10, 3 percent

Me thinks Standard is supposed to be your 100%, your base. Therefore my 90.6% should be right, I hope.
In other words they were 9.4% less efficient than they should have been.

[Houses4Rent]

Oh ok. The more accurate formula, that takes account of any stratification, is (Actual Time x Standard Rate) - (Standard Time X Standard Rate)
So, if I understand the data correctly, it is:
(18 x 108 x 750) - (17 x 114 x 750) = 4,500 unfavourable
Actual rate is ignored because it is an efficiency variance that is being determined.

Clive, you missed the R850 and you need to turn it around, i.e.
(17 x 114 x 750) - (18 x 108 x 850)

[speed_demon]

Oh ok. The more accurate formula, that takes account of any stratification, is (Actual Time x Standard Rate) - (Standard Time X Standard Rate)
So, if I understand the data correctly, it is:
(18 x 108 x 750) - (17 x 114 x 750) = 4,500 unfavourable

Actual rate is ignored because it is an efficiency variance that is being determined.

This is my logic too. My main issue was how to incorporate the change in employee counts.

[CLIVE-TRIANGLE]

Houses, it is a specific measurement of direct labour efficiency. You compare the standard hours that it should have taken to produce, to the actual hours it took, and multiply the difference in hours by the standard cost per direct labor hour.

If you start mixing standard and actual rates you corrupt the measurement.

[Houses4Rent]

I am not with you. Efficiency is always a percentage.

>multiply the difference in hours by the standard cost per direct labor hour
That would be a Rand amount, not a percentage

[CLIVE-TRIANGLE]

It's a classical cost accounting formula.

The variance account for any period will have a balance. The balance consists of mainly two components, one of which is efficiency; the other is mostly rate.

So, if you subtract the efficiency variance, you are left with a balance that points to a mainly rate problem, either too high or too low.

Here is a decent explanation