XYZ Company makes one product and has calculated the following amounts for direct labor: AH x AR = $84,000; AH x SR = $83,000; SH x SR = $85,000. Compute the labor efficiency variance.

• A. $1,000 Favorable
• B. $3,000 Favorable
• C. $2,000 Favorable
• D. $2,000 Unfavorable

Answer: (C)

Labor efficiency variance measures whether actual hours used differ from the standard hours required for the actual output, valued at the standard rate. Because we know the cost for actual hours at the standard rate (AH × SR) and the standard cost for the actual output (SH × SR), we can find the efficiency variance by subtracting AH × SR from SH × SR: (SH × SR) − (AH × SR).

Here, SH × SR = 85,000 and AH × SR = 83,000, so the variance is 2,000 favorable. This positive result means the company used fewer actual hours than the standard hours allowed for the output, at the standard rate, signaling efficiency above plan. (Note: AH × AR − AH × SR would give the labor rate variance, which is a different component.)