## 4.2. Efficiency (usage) variances

There are two types of efficiency variances related to the direct costs: direct materials efficiency variance and direct labor efficiency variance. They are calculated by using the same logic: the difference between the standard quantity of input and the actual quantity of input is multiplied by the standard price. It makes sense to calculate the difference between actual and standard input quantities because this difference shows how efficiently a company uses its resources in production.

Direct materials efficiency (usage) variance (MEV) compares a standard and actual quantity of direct materials used in production (i.e., materials put in production represent input quantity). In other words, it is the difference between the actual quantity of materials used and the standard quantity that should have been used at the actual production level, multiplied by the standard price.

The formula follows:

 Direct Materials Efficiency Variance = (Actual Quantity For Actual Output � Standard Quantity For Actual Output) x Standard Price
 MEV = (AQ � SQ) x SP

Where MEV = Materials efficiency variance; AQ = Actual quantity of input for actual output; SQ = Standard quantity of input for actual output; and SP = Standard price.

To illustrate an example, let's return to XLCoutureDresses Inc. The company usually uses 10 yards of embroidered silk fabric per evening dress. The standard price of 1 yard of this fabric is \$100. In April 20X0, the company manufactured 100 dresses using 900 yards of embroidered silk fabric. In this case, the standard quantity (of input) for actual output is 1,000 yards of embroidered silk fabric: 100 dresses (actual output) times 10 yards per dress = 1,000 yards. Now we can calculate the direct materials efficiency variance: MEV = (900 yards � 1,000 yards) x \$100 per yard = - \$1,000 or \$1,000 F. The materials efficiency variance is favorable because the company used 100 yards of materials less than the standard required.

In April 20X0, the company made the following journal entry:

 Account Titles Debit Credit Work-in-process Inventory (1,000 yards x \$100) 10,000 Direct Materials Efficiency Variance 1,000 Raw Materials (900 yards x \$100 per yard) 9,000

As you can see once again, companies enter data into the inventory accounts at standard prices and standard quantities. Previously, XLCoutureDresses recorded the purchased raw materials in the raw inventory accounts at the standard price (e.g. in April 20X0, 60 yards x \$100 per yard). When the company used the materials in production, it credited the raw materials inventory for the actual amount of raw materials used times the standard price (i.e., 900 yards x \$100 per yard). Also, the company recorded the used materials in the work-in-process inventory account at both the standard quantity and standard price (i.e., 1,000 yards x \$100 per yard).

Direct labor efficiency (usage) variance (LEV) compares the actual and standard amounts of labor hours used in production. In other words, it is the difference between the actual hours used and the standard hours that should have been used at the actual production level, multiplied by the standard rate.

The formula follows:

 Direct Labor Efficiency Variance =(Actual Hours For Actual Output � Standard Hours For Actual Output) x Standard Price
 LEV = (AQ � SQ) x SP

Where LEV = Labor efficiency variance; AQ = Actual quantity of input (hours) for actual output; SQ = Standard quantity of input (hours) for actual output; and SP = Standard price (rate).

To illustrate an example, let's again use XLCoutureDresses Inc. The company usually uses 8 hours of direct labor per evening dress. The standard price (rate) of 1 labor hour is \$10. In April 20X0, the company manufactured 100 dresses using 820 labor hours. In this case, the standard quantity (of input) for the actual output is 800 direct labor hours: 100 dresses (actual output) times 8 labor hours per dress = 800 labor hours. Now we can calculate the direct labor efficiency variance: LEV = (820 hours � 800 hours) x \$10 per hour = \$200 or \$200 U. The labor efficiency variance is unfavorable because the company used 20 labor hours more than the standard required.

In April 20X0, the company made the following journal entry:

 Account Titles Debit Credit Work-in-process Inventory (800 hours x \$10 per hour) 8,000 Direct Labor Efficiency Variance 200 Wages Payable (820 hours x \$10 per hour) 8,200
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