Definition: In manufacturing processes, managers use different ratios and budgets to analysis the productivity of the factory output. It’s common for management to set benchmarks and expectations for costs and output before the manufacturing process even starts. This way management can analyze the difference between the estimated performance and the actual performance.
This comparison is known as a variance. The most common variance using the overhead cost variance analysis are the spending variance, volume variance, and efficiency variance.
What Does Efficiency Variance Mean?
Efficiency variance is the difference between the actual quantity of input put into a manufacturing process and the estimated or budgeted quantity. The input could be labor hours or other overhead costs. The efficiency variance shows how productive or efficient the manufacturing process was with its inputs.
Were all the inputs used appropriately or were some wasted? Since the efficiency variance is a variable overhead variance, it can be controlled with improving productivity and decreasing overall output.
Let’s use direct labor hours as an example. Before the manufacturing process started, management might have estimated that 100 labor hours would be needed to manufacture a specific product. After the products were finished, the labor records show that 110 hours were actually used. The efficiency variance on the labor hours for this manufacturing process is -10.
This means that 10 hours of labor was wasted during the manufacturing process. It also means that this process was not as productive or cost-effective as the management originally expected.