The effective method for appraising the level of efficiency of the productive capacity of a business to labor is by the control ratio.

Control ratios are an extension of basic variance analysis strictly restricted to fixed productive volume.

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Control ratios have three types. These are :

Capacity ratio,

2. Efficiency ratio and,

3. Activity ratio.

Capacity Ratio(also known as the actual usage ratio):

Capacity ratio is designed to compare actual hours worked to budgeted hours and also to indicate when a business operates above or below capacity. The primary objective is to measure the actual level of activity.

Capacity ratio is expressed mathematically as;

Actual hours/budgeted hours x 100/1.

Efficiency Ratio (also known as productivity ratio):

Efficiency ratio is used to measure the actual level of employees’ productivity.

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The ratio achieves this by comparing the standard hours on the basis of actual output to the actual hours worked.

Efficiency ratio is mathematically expressed as; Standard hours/actual hours x 100/1

Activity Ratio (also known as production volume ratio):

Activity ratio is used to measure budgeted production volume of a business in terms of labor. It compares standard hours on the basis of actual output to budgeted hours.

Activity ratio is mathematically expressed as;

Standard hours/budgeted hours x 100/1

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If company XYZ had the following information about departments A and B;

Budgeted standard hours – A: 4,000 and B: 3,000,

2. Actual hours worked – A: 4,500 and B: 2,500,

3. Actual production – A: 10,000 units and B: 3,000 units.

4. Department A uses 1/4 hours to produce one unit while Department B uses 1/2 hours to produce one unit.

A. The capacity or actual usage ratio is obtained thus;

Actual hours worked/budgeted hours x 100/1

a. For Department A : 4,500/4,000 x 100% = 112.5%

b For Department B: 2,500/3,000 x 100% = 83%.

B. The efficiency or productivity ratio is obtained thus;

Standard hours/actual hours x 100/1

a. For Department A: *2,500/4,500 x 100% = 55.6%,

b. For Department B: *1,500/2,500 x 100% = 60%

Note that *2, 500 = 1/4 hours to produce a unit x 10,000 units produced by Department A and,

*1,500 = 1/2 hours to produce a unit x 3,000 units produced by Department B.

C. Activity ratio or production volume ratio is obtained thus;