Dictionary / Efficiency Variance
What does Efficiency Variance mean in accounting?
Quick definition
Payroll & laborA variance resulting from causes other than a change in the price or direct costs or of materials or labor. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
Extra bench hours, same wage
You run a commercial bakery. Your cost standard allows 3 hours of bench time per 50-loaf sourdough batch at $22 an hour. In April you bake 8 batches for a market client, and the crew clocks 32 hours at the same $22 rate, so $704 posts to payroll. Standard time was 24 hours ($528); the extra 8 hours ($176) is an unfavorable efficiency variance because the wage did not change. Watch the batch sheet, not the pay rate, and do not treat the extra as a raise.
The cloth bill rose, the sewers did not
You sew commercial drapes. The cost standard is $14 a yard of blackout cloth and 8 yards per pair. In October you finish 6 pairs for a hotel lobby, and a cloth supplier invoices 48 yards at $17 a yard ($816). You used exactly 8 yards per pair, with no extra cuts and no extra hours. The extra $3 a yard ($144) is a price variance on that bill; the usage yardstick was met. Do not label that $144 efficiency and start timing the sewers; refresh the standard or renegotiate the cloth.
Why it matters
Efficiency variance is the gap between a cost standard and what you actually used, when the cause is hours, scrap, or yield, not a new price. You compute it after a production run or when you close a job that has a preset; a shop that never writes standards almost never needs this label. Price variance is the other slice: the vendor or wage rate changed. If you dump the whole overage into cost overruns, you may switch suppliers when the crew used extra hours, or coach the floor when a mill raised the per-unit price.
Further reading
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What is Efficiency Variance in bookkeeping?
A variance resulting from causes other than a change in the price or direct costs or of materials or labor.
When should I use Efficiency Variance?
Use Efficiency Variance when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Efficiency Variance?
Efficiency Variance is used for efficiency variance entries, while Earned Income covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.