What Are Control Ratios?

Photo by Chokniti Khongchum on Pexels.com

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.

Advertisements


Control ratios have three types. These are :

  1. 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.

Advertisements


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

Advertisements

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

  1. 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;

Standard hours/budgeted hours x 100/1


a. For Department A: 2,500/4,000 x 100% = 62.5%

b. For Department B: 1,500/3,000 x 100% = 50%.

Leave a Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s