Confused about capacity and efficiency ratio

Confused about capacity and efficiency ratio

Come back to the ratio formulas in a minute<BR><BR>1st Do you understand what capacity is measuring?<BR><BR>In many respects it is time. <BR>If on a busy Saturday you reckon you can allocate 9.00-11.00 to make sandwiches, then 2 hours are your budgeted capacity. <BR>If you end up spending 3 hours on the task you had more capacity than budget i.e. a ratio of more than 1.<BR><BR>2nd Do you understand efficiency?<BR><BR>This is how well you use the time<BR>If the task is to make sandwiches and you have a standard time of a quarter of an hour per sandwich this enables you to find the standard time.<BR>The sandwiches that you made (say 10) should take 2½ standard hours. But you actually needed 3 hours so you were less efficient than the standard. i.e. a ratio of less than 1<BR><BR>Now go back to formulas, but this time with the clear idea of the sandwiches that you made.<BR><BR>Capacity Ratio:-<BR>Actual hours/Budgeted hours<BR><BR>3/2 x100 = 150%<BR><BR>Efficiency Ratio<BR>Standard hours of actual production/ Actual Hours<BR><BR>2½/3 x 100 = 83.3%<BR><BR>Your final question suggests that we might identify efficiency without knowing the standard time. Unless you know the time it should take for what you made (the standard time) you do not have something to compare against. The budget will almost always be a different to the actual output so this cannot be used. As a result you do not have enough data to find an efficiency ratio.<BR><BR>Another point about capacity as it appears in the Nov 04 paper<BR>The question tells you the MAX labour hours for each factory and has earlier told you the budgeted labour hours. (At no time does it look back at the end of the year and say ...hours were actually worked - the year hasn't started yet)<BR><BR>This is why the formulas MUST follow your understanding. Think about capacity, it's the time you can allocate to a job as a proportion of the total time. So if a factory could have 140,000 hours but is only planning to use 85,000 then it is planning to run below capacity at 60.7%. AND if the factory normally operates an 8-4 shift 5 days per week, but because there is a backlog of orders it needs to run some weekend or even some 4-12 shifts then capacity can be more than 100%. In the case of Factory A, the capacity is only 70,000 but the budget is looking to use a few EXTRA shifts and use 75,000 hours so the capacity ratio would be 107.1%<BR><BR>I hope this helps<BR><BR><BR>Sandy