Efficiency Variance is that portion of the volume variance which arises due to increased or reduced output because of more or less efficiency than expected. It signifies deviation of standard quantity from the actual quantity produced. This variance is related to the efficiency variance of labour. Efficiency variance is calculated as:
Standard Rate (Actual Quantity – Standard Quantity)
or, Standard Rate per hour (Standard Hours Produced – Actual Hours).
If Actual quantity is more than the budgeted quantity, the variance will be favourable and it will be vice versa if actual quantity is less than the budgeted quantity.