Efficiency variance is the difference between resources used and those that should have been used. It can be measured in material usage and labor efficiency. Every industry can track resource drifts in their operations to improve efficiency. Setting unreasonable efficiency goals can burn out employees.
An efficiency variance is the difference between the resources used in a business operation and the resources that should have been used in the business operation. Efficiency drifts occur every day in businesses and should be reviewed to determine how the business is functioning. For example, it might take an average of 5 minutes per customer in a driveway window, but broken machinery or inexperienced staff can add up to at least 10 minutes. While manufacturing and manufacturing companies may have greater efficiency drifts than other companies, managers in every industry can take advantage of audits to track resource drifts in their operations. Material use and labor are two traditional types of efficiency variation in manufacturing and manufacturing operations.
Material usage variance is measured using two methods: calculating the difference between the actual materials used, and calculating the price difference between the materials used. Calculating the difference in materials used is important because most businesses have a certain amount of resources to use in the production of goods. Using more materials than necessary may indicate poor manufacturing methods or that the company has purchased inferior materials to produce goods.
Companies determine the change in material costs by subtracting the materials used in manufacturing from the expected material use and multiplying the difference by the unit cost of the materials. This variation in efficiency can be favorable or unfavorable, depending on the amount of material actually used in the production process.
Changes in labor efficiency are calculated using a method similar to changes in material use. The labor efficiency variance tells a rather different story, however. Firms plan to hire productive labor at set wages for a set number of employees. Companies determine how many man-hours should be spent producing goods and compare this to the actual man-hours used in the production process. Management will review how many workers have been hired and wages paid to each employee against budget. The change in labor efficiency can be favorable or unfavorable depending on the difference in man-hour calculations.
Efficiency variance revisions are found in many different industries. For example, retail stores can track each cashier’s checkout time. In the fast food industry, restaurants can consider the time it takes to serve each customer in the drive-through. Repair companies often send employees out into the field and can measure efficiency by examining how long their technicians spend on repair work.
Setting unreasonable efficiency goals can burn out employees by requiring them to complete difficult tasks in a short amount of time. Conversely, companies can offer rewards to employees for consistently achieving the company’s standard goal of efficient operations through smart and efficient employee production methods.
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