Efficiency Variance

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DEFINITION of 'Efficiency Variance'

The difference between the theoretical amount of inputs required to produce a unit of output and the actual amount of inputs used. In manufacturing, efficiency variance can be used to analyze the effectiveness with respect to labor, materials, machine time and other production factors.

BREAKING DOWN 'Efficiency Variance'

An important factor in measuring efficiency variance is the development of a set of realistic assumptions surrounding the theoretical amount of inputs that should be required. If the actual amount of inputs used exceeds the amount theoretically required, there is a negative efficiency variance. On the other hand, if actual inputs are less than the amounts theoretically required, then there would be a positive efficiency variance. Since the baseline theoretical inputs are often calculated for the optimal conditions, a slightly negative efficiency variance is normally expected.

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RELATED FAQS
  1. How is an unfavorable variance discovered?

    An unfavorable variance is discovered when actual numbers and budget numbers are compared. Unfavorable variance can be computed ... Read Full Answer >>
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    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
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    Cash or stock dividends distributed to shareholders are not considered an expense on a company's income statement. Stock ... Read Full Answer >>
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