Question 16.2: Calculation of efficiency, capacity and production volume ra...

(a) The efficiency ratio:

\frac{Standard  hours  produced}{Actual  direct  labour  hours  worked} \times 100=\frac{900^*}{800} \times 100=\underline{112.5\%}

* Each unit is allowed 10 standard hours (1000 hours/100 units). Since 90 units were produced, the total standard hours of production must equal 900.

It would appear that the company has been more efficient in producing the goods than was expected. It was allowed 900 hours to do so but it produced them in only 800 hours.

(b) The capacity ratio:

\frac{Actual  direct  labour  hours  worked}{Budgeted  hours} \times 100= \frac{800}{1000} \times 100= \underline{80\%}

All of the time planned to be available (the capacity) was not utilised, either because it was not possible to work 1000 direct labour hours or because the company did not undertake as much work as it could have done.

(c) The production volume ratio:

\frac{Standard  hours  produced}{Budgeted  hours} \times 100= \frac{900^*}{1000} \times 100=\underline{90\%}

* As calculated for the efficiency ratio.

It appears that if 90 units had been produced in standard conditions, another 100 hours would have been available (10 units × 10 hours). Since the 90 units only took 800 hours to produce, at least another 20 units \left(\frac{1000-800}{10} \right) could have been produced in standard conditions. 

Comments

The budget allowed for 100 units to be produced and each unit was expected to take 10 direct labour hours to complete, a total budgeted activity of 1000 direct labour hours. However, only 90 units were actually produced. If these units had been produced in standard time, they should have taken 900 hours (90 units × 10 direct labour hours). These are the standard hours produced. The 90 units were completed in 800 actual hours. It appears, therefore, that the units were produced more efficiently than had been expected. The management will still need, of course, to investigate why only 90 units were produced and not the 100 units expected in the budget.