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In Business, what is Efficiency Variance?

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  • Written By: Osmand Vitez
  • Edited By: Jenn Walker
  • Last Modified Date: 08 November 2016
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An efficiency variance is the difference between resources used in a business operation and the resources that should have been used in the business operation. Efficiency variances occur every day in companies and should be reviewed to determine how well the company operates. For example, it may take 5 minutes per customer on average at a drive-through window, but broken machinery or untrained staff may increase that to 10 minutes or more. While manufacturing and production companies may have more efficiency variances than other companies, managers from every industry can benefit from controls to track the resource variances in their operations. Materials usage and labor are two traditional types of efficiency variance in manufacturing and production business operations.

Materials usage variance is measured using two methods: calculating the difference in actual materials used and calculating the price difference of materials used. Calculating the difference in materials used is important because most companies have a set amount of resources to use for producing goods. Using more materials than necessary may indicate poor production methods or that the company has purchased inferior materials for producing goods.

Companies determine the cost variance of materials by subtracting the materials used in production from the expected materials usage and multiplying the difference by the per unit cost of materials. This efficiency variance may be favorable or unfavorable, depending on how much material was actually used in the production process.

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Labor efficiency variances are calculated using a similar method to that of the material usage variances. The labor efficiency variance tells quite a different story, however. Companies plan for production labor to be hired at certain wages for a specific number of employees. Companies determine how many man hours it should take to produce goods and compare it to the actual man hours used in the production process. Management will review how many workers were hired and the wages paid to each employee compared to the expected budget. The labor efficiency variance may be favorable or unfavorable depending on the calculations on the difference in man hours.

Efficiency variance reviews are found in many different business industries. For example, retail stores may track each cashier’s checkout time. In the fast food industry, restaurants may time how long it takes for each customer to be served in the drive-through. Repair companies often send employees into the field and may measure efficiency by reviewing how long their technicians spend on repair jobs.

Setting unreasonable efficiency goals may burn out employees by requiring them to complete difficult tasks in a short amount of time. Conversely, companies may 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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bluedolphin
Post 3

Efficiency variance is interesting, because it's based on an estimate of how much inputs is required to produce something. And I think that this estimate is mainly based on the best efficiency a company has achieved so far. So it can change.

For example, a business may estimate that it needs an x amount of cocoa to make chocolate. And if the amount turns out higher than that, that's an efficiency variance showing that the company is not running at the highest efficiency possible. But how is the "x" determined? It's kind of confusing.

turquoise
Post 2

@fBoyle-- Yes, it maters. Time is also a resource. And using time inefficiently means loss of profits. If it takes five minutes extra for each customer to go through the drive-through, that means that less customers will be served that day. Less customers means less profit. So it's important to limit negative efficiency variance.

The goal of each business is to maximize profit but using resources as efficiently as possible. This means reducing costs and expenses and increasing earnings. There are many different measurements for efficiency and efficiency variance is just one of them. These measurements help a business analyze its situation.

fBoyle
Post 1

Does efficiency variance really matter? In the drive-through example, if it takes five minutes longer than usual, what does that mean? The restaurant is still making the same amount of money and it's still using the same resources.

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