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When the overall labor variance is favorable, should management go concentrate their efforts on other aspects...

When the overall labor variance is favorable, should management go concentrate their efforts on other aspects of running the business and forget about the variance since it is favorable? After all, favorable is good, isn't it?

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Answer #1

Answer: No; favorable is not always good.

Labor variance is the aggregate of labor rate variance and labor efficiency variance.

Rate variance indicates the difference between actual rate and standard rate of labor. Favorable variance indicates that the actual rate is smaller than standard rate. If this variance is favorable with high margin always, it indicates that the standard is set very high – which needs to be revised immediately.

Efficiency variance is the difference of actual hours worked and standard hours needed. Favorable variance appears if actual hour is smaller than standard hour. If it has very high favorable balance, there is a chance of waste of material and errors in work; these need to be checked rigorously. After all there must be a limit of efficiency of a person.

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