CAT / FIA FMA Syllabus C. Cost Accounting Techniques - Labour ratios - Notes ^{15 / 23}

Labour Efficiency Ratio

- measures the performance of the workforce by comparing the actual time taken to do a job with the expected time.

                                              Standard hours  
Labour Efficiency Ratio =  ------------------   x 100%
                                              Actual hours

Illustration

A Co. budgeted to work 8,000 hours manufacturing 20,000 units.

They actually produced 25,000 units and it actually took them 11,000 hours to produce them.

What is the labour efficiency ratio?

Solution

1. Step 1: Calculate the Standard hours

   Budgeted hours to produce 1 unit = 8,000 hours / 20,000 units = 0.4 hours per unit

   Standard hours to produce the Actual units =  0.4hr per unit  x 25,000 units = 10,000 hours

2. Step 2: Calculate the Labour Efficiency ratio

   Labour Efficiency ratio = Standard hours / Actual hours  x 100%

   = 10,000 / 11,000  x 100% = 90.9%

Labour Capacity Ratio

- measures the number of hours spent actively working as a percentage of the total hours available for work.

                                           Actual hours  
Labour Capacity Ratio =  --------------------   x 100%
                                           Budgeted hours

Illustration

A Co. budgeted to work 8,000 hours manufacturing 20,000 units.

They actually produced 25,000 units and actually took 11,000 hours.

What is the capacity ratio?

Solution

• Labour Capacity Ratio =  Actual hours  / Budgeted hours   x 100%
                                             
  Labour Capacity Ratio = 11,000 / 8,000 x 100% = 137.5%

Labour Production Volume Ratio

- compares the number of hours expected to be worked to produce actual output ( Standard hours) with the total hours available for work (Budgeted hours).

                                                              Standard hours  
Labour Production Volume Ratio =  --------------------   x 100%
                                                             Budgeted hours

Illustration

A Co. budgeted on producing 20,000 units with 8,000 budgeted labour hours.

They actually produced 25,000 units and actually took 11,000 hours.

What is the labour production volume ratio?

Solution

1. Step 1: Calculate the Standard hours

   Budgeted hours to produce 1 unit = 8,000 hours / 20,000 units = 0.4 hours per unit

   Standard hours to produce the Actual units =  0.4hr per unit  x 25,000 units = 10,000 hours

2. Step 2: Calculate the Labour Efficiency ratio

   Labour Production Volume Ratio = Standard hours / Budgeted hours x 100%

   Labour Production Volume Ratio = 10,000 / 8,000 x 100% = 125%